Edgar Filing: PACIFIC CAPITAL BANCORP /CA/

Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

COMMISSION FILE NUMBER NO: 0-11113

PACIFIC CAPITAL BANCORP

(Exact Name of Registrant as Specified in its Charter)


California		95-3673456
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1021 Anacapa Street Santa Barbara, California		93101
(Address of principal executive offices)		(Zip Code)

(805) 564-6405

(Registrant’s telephone number, including area code)

Not Applicable

Former name, former address and former fiscal year, if changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and a “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨


				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Number of shares of common stock of the registrant outstanding as of October 30, 2008: 46,615,371

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION			3

	Forward-looking statements		3

	Item 1.	Financial Statements:

		Consolidated Balance Sheets as of September 30, 2008 (Unaudited) and as of December 31, 2007	4

		Consolidated Statements of Income (Unaudited)	5

		Consolidated Statements of Comprehensive Income (Unaudited)	6

		Consolidated Statements of Cash Flows (Unaudited)	7

		Notes to Condensed Consolidated Financial Statements (Unaudited)	8

The financial statements included in this Form 10-Q should be read with reference to Pacific Capital Bancorp’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57

	Item 4.	Controls and Procedures	61

Glossary			62

PART II. OTHER INFORMATION			64

	Item 1.	Legal Proceedings	64

	Item 1A.	Risk Factors	64

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64

	Item 3.	Defaults Upon Senior Securities	64

	Item 4.	Submission of Matters to a Vote of Security Holders	64

	Item 5.	Other Information	64

	Item 6.	Exhibits	64

SIGNATURES			64

PART I – FINANCIAL INFORMATION

Forward-Looking Statements

Certain statements contained in Pacific Capital Bancorp’s (“the Company”) Annual Report on Form 10-K and Quarterly Report on Form 10-Q, as well as statements by the Company in periodic press releases and oral statements made by Company officials to securities analysts and shareholders during presentations about the Company, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these provisions. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, statements that relate to or are dependent on estimates or assumptions relating to the prospects of continued loan and deposit growth, improved credit quality, the health of the capital markets, the Company’s de novo branching and acquisition efforts, the operating characteristics of the Company’s income tax refund loan and transfer programs and the economic conditions within its markets. These forward-looking statements involve certain risks and uncertainties, many of which are beyond the Company’s control. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, (1) increased competitive pressure among financial services companies; (2) changes in the interest rate environment reducing interest margins or increasing interest rate risk; (3) deterioration in general economic conditions, internationally, nationally or in California; (4) the occurrence of terrorist acts or natural disasters, such as earthquakes; (5) reduced demand for or earnings derived from the Company’s refund anticipation loan (“RAL”) and refund transfer (“RT”) programs; (6) legislative or regulatory changes or litigation adversely affecting the businesses in which the Company engages; (7) unfavorable conditions in the capital markets; (8) challenges in opening additional branches, integrating acquisitions or introducing new products or services; and (9) other risks detailed in reports filed by the Company with the Securities and Exchange Commission (“SEC”). Forward-looking statements speak only as of the date they are made, and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. For a more detailed description of the risk factors associated with the Company’s businesses, please refer to Part II, Item 1A of this Form 10-Q and to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

The assets, liabilities, and results of operations of the Company’s tax refund and transfer programs (“RAL and RT programs”) are reported in its periodic filings with the SEC as a segment of its business. Because these are activities conducted by very few other financial institutions, users of the financial statements have indicated that they are interested in information for the Company exclusive of these programs so that they may compare the results of operations with financial institutions that do not have comparable programs. The amounts and ratios may generally be computed from the information provided in the notes to the financial statements that disclose segment information, but are computed and included in the Company’s Annual Report on Form 10-K and Quarterly Report Form 10-Q for the convenience of those users.

Purpose and Definition of Terms

The following document includes executive management’s (“Management”) insight of the Company’s financial condition and results of operations of Pacific Capital Bancorp (“PCB”) and its subsidiaries. Unless otherwise stated, “the Company” refers to this consolidated entity. The Company utilizes the term “Core Bank” throughout this Form 10-Q (“10-Q”). Core Bank is defined as the consolidated financial results less the financial results from the RAL and RT Programs and is interchangeably referred to as “Excluding RAL and RT”.

Net interest margin is discussed throughout this document and presented on a fully tax equivalent basis (“FTE”). This discussion should be read in conjunction with the Company’s 2007 Annual Report on Form 10-K (“2007 10-K”). Terms and acronyms used throughout this document are defined in the glossary on pages 62 through 63.

Pacific Capital Bancorp and Subsidiaries

CONSOLIDATED BALANCE SHEETS


	September 30, 2008 (unaudited)			December 31, 2007
	(in thousands, except per share amounts)
Assets:
Cash and due from banks	$	122,991		$	141,086
Federal funds sold		55,000			—

Cash and cash equivalents		177,991			141,086
Investment securities—trading, at fair value		202,557			146,862
Investment securities—available-for-sale, at fair value; amortized cost of $990,929 at September 30, 2008 and $1,147,824 at December 31, 2007		990,083			1,176,887
Loans:
Held for sale, at lower of cost or fair value		145,350			68,343
Held for investment, net of allowance for loan losses of $122,097 at September 30, 2008 and $44,843 at December 31, 2007		5,600,117			5,314,313

Total loans		5,745,467			5,382,656
Premises and equipment, net		79,409			86,921
Goodwill and other intangible assets		139,732			155,786
Other assets		353,409			284,148

Total assets	$	7,688,648		$	7,374,346

Liabilities:
Deposits:
Non-interest-bearing demand	$	989,025		$	1,002,281
Interest-bearing		3,952,279			3,961,531

Total deposits		4,941,304			4,963,812
Securities sold under agreements to repurchase		349,924			265,873
Federal funds purchased		8,200			6,800
Long-term debt and other borrowings		1,660,986			1,405,602
Other liabilities		85,885			63,903

Total liabilities		7,046,299			6,705,990


Commitments and contingencies (Note 12)

Shareholders’ equity:
Preferred stock — no par value; 1,000 shares authorized, no shares issued and outstanding.		—			—
Common stock — no par value; $0.25 per share stated value; 100,000 authorized; 46,206 shares issued and outstanding at September 30, 2008 and 46,127 at December 31, 2007		11,556			11,537
Surplus		107,614			103,953
Retained earnings		524,815			537,065
Accumulated other comprehensive income		(1,636	)		15,801

Total shareholders’ equity		642,349			668,356

Total liabilities and shareholders’ equity	$	7,688,648		$	7,374,346

See the accompanying notes.

Pacific Capital Bancorp and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	Three-Months Ended September 30,						Nine-Months Ended September 30,
	*2008*			*2007*			*2008*			*2007*
	(in thousands, except per share amounts)
Interest income:
Loans	$	88,109		$	101,404		$	371,358		$	432,869
Investment securities—trading		2,484			—			4,121			—
Investment securities—available-for-sale		12,021			11,736			39,366			36,276
Other		119			1,519			2,281			2,629

Total interest income		102,733			114,659			417,126			471,774

Interest expense:
Deposits		18,565			32,399			65,377			99,236
Securities sold under agreements to repurchase		3,020			2,727			8,446			7,828
Federal funds purchased		424			723			1,413			6,737
Long-term debt and other borrowings		19,902			18,842			55,516			55,760

Total interest expense		41,911			54,691			130,752			169,561

Net interest income		60,822			59,968			286,374			302,213
Provision for loan losses		63,962			24,401			149,523			108,494

Net interest (loss)/income after provision for loan losses		(3,140	)		35,567			136,851			193,719

Non-interest income:
Service charges and fees		8,028			8,551			27,220			31,659
Trust and investment advisory fees		6,352			6,009			19,637			18,183
Refund transfer fees		385			370			68,576			45,756
Gain on sale of RALs, net		—			—			44,580			41,822
Gain on sale of leasing portfolio		—			—			—			24,344
(Loss)/Gain on securities, net		(487	)		5			(422	)		1,944
Other		2,462			2,335			4,666			6,663

Total non-interest income		16,740			17,270			164,257			170,371

Non-interest expenses:
Salaries and employee benefits		28,593			26,987			94,598			93,867
Goodwill impairment		22,068			—			22,068			—
Occupancy expenses, net		6,178			5,552			19,192			16,440
Furniture, fixtures and equipment, net		2,291			2,224			6,871			7,301
Refund program marketing and technology fees		—			—			46,257			44,500
Other		23,041			17,412			79,722			62,024

Total non-interest expenses		82,171			52,175			268,708			224,132

(Loss)/income before (benefit)/provision for income taxes		(68,571	)		662			32,400			139,958
(Benefit)/provision for income taxes		(21,070	)		(3,191	)		13,311			51,301

(Loss)/Net income	$	(47,501	)	$	3,853		$	19,089		$	88,657

(Loss)/income per share—basic	$	(1.03	)	$	0.08		$	0.41		$	1.89
(Loss)/income per share—diluted (Note 3)	$	(1.03	)	$	0.08		$	0.41		$	1.88
Average number of shares—basic		46,197			46,945			46,169			46,971
Average number of shares—diluted		46,624			47,179			46,526			47,244
Dividends per share	$	0.22		$	0.22		$	0.66		$	0.66

See the accompanying notes.

Pacific Capital Bancorp and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	Three-Months Ended September 30,						Nine-Months Ended September 30,
	*2008*			*2007*			*2008*			*2007*
	(in thousands)
Net (loss)/income	$	(47,501	)	$	3,853		$	19,089		$	88,657

Other comprehensive (loss)/income, net:
Unrealized (loss) gain on securities AFS, net		(10,996	)		5,633			(19,772	)		586
Impairment loss on securities, net		462			—			2,406			—
Realized loss/(gain) on sale of securities AFS included in income, net		37			(18	)		34			(1,143	)
Postretirement benefit obligation arising during period, net		(35	)		10			(104	)		56

Net other comprehensive (loss)/income		(10,532	)		5,625			(17,437	)		(501	)

Comprehensive (loss)/income	$	(58,033	)	$	9,478		$	1,652		$	88,156

The amounts reclassified out of accumulated other comprehensive income into earnings for the three and nine month periods ended September 30, 2008, were $861,000 and $4.2 million, respectively. The income tax benefit related to these amounts were $362,000 and $1.8 million for the three and nine month periods ended September 30, 2008, respectively. The amount reclassified out of accumulated other comprehensive income into earnings for the three and nine month periods ended September 30, 2007 were $31,000 and $2.0 million. The income tax expense related to these amounts were $13,000 and $830,000 for the three and nine periods ended September 30, 2007, respectively.

See the accompanying notes.

Pacific Capital Bancorp and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Nine-Months Ended September 30,
	*2008*			*2007*
	(in thousands)
Cash flows from operating activities:
Net income	$	19,089		$	88,657
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		149,523			108,494
Depreciation and amortization		18,210			15,089
Stock-based compensation		3,474			4,619
Excess tax benefit of stock-based compensation		(48	)		(821	)
Net amortization of discounts and premiums for investment securities		(7,317	)		(8,447	)
Loans originated for sale and principal collections, net		13,383			—
Goodwill impairment		22,068			—
(Gains)/losses on:
Sale of loans, net		(45,572	)		(66,095	)
Securities, AFS		4,210			(1,971	)
Changes in:
Other assets		(54,127	)		(17,616	)
Other liabilities		21,302			9,223
Trading securities, net		(55,695	)		(2	)
Servicing rights, net		226			86

Net cash provided by operating activities		88,726			131,216

Cash flows from investing activities:
Proceeds from loan sales		2,125,822			2,130,529
Proceeds from sales, calls and maturities of AFS securities		123,565			314,772
Principal pay downs and maturities of AFS securities		367,935			199,721
Purchase of AFS securities		(331,500	)		(314,053	)
Loan originations and principal collections, net		(2,605,967	)		(2,045,610	)
Purchase of Federal Home Loan Bank stock		(10,785	)		(3,551	)
Purchase of premises and equipment, net		(8,952	)		(7,346	)
Proceeds from sale of other real estate owned		420			—

Net cash (used in) provided by investing activities		(339,462	)		274,462

Cash flows from financing activities:
Net decrease in deposits		(22,508	)		(197,754	)
Net increase (decrease) in short-term borrowings		84,888			(158,776	)
Proceeds from long-term debt and other borrowings		495,000			310,000
Repayments of long-term debt and other borrowings		(239,230	)		(220,994	)
Excess tax benefit of stock-based compensation		48			821
Proceeds from exercise of stock options		287			3,199
Payments to retire common stock		—			(14,970	)
Cash dividends paid on common stock		(30,763	)		(31,329	)
Other, net		(81	)		761

Net cash provided by financing activities		287,641			(309,042	)

Net increase in cash and due from banks		36,905			96,636
Cash and cash equivalents at beginning of period		141,086			154,182

Cash and cash equivalents at end of period	$	177,991		$	250,818

Supplemental disclosure:
Cash paid during the period for:
Interest	$	129,940		$	172,315
Income Taxes		46,552			42,601
Non-cash investing activity:
Transfers to other real estate owned		1,824			—
Transfers from loans held for sale to trading securities		68,343			—
Net transfer of loans held for investment to loans held for sale		150,013			233,939

See the accompanying notes.

Pacific Capital Bancorp and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The financial statements and notes included in this 10-Q should be read with reference to Pacific Capital Bancorp’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

Nature of Operations

Pacific Capital Bancorp (“PCB” or “the Company”) is a bank holding company organized under the laws of the state of California. PCB provides a full range of commercial and consumer banking services to households, professionals, and businesses through its wholly-owned subsidiary Pacific Capital Bank, N.A. (“PCBNA” or “the Bank”). These banking services include depository, lending and wealth management services. PCBNA’s lending products include commercial, consumer, commercial and residential real estate loans and Small Business Administration (“SBA”) loans. PCBNA is also one of the largest nationwide providers of financial services related to the electronic filing of income tax returns including the RAL and RT business products. Depository services include checking, interest-bearing checking (“NOW”), money market (“MMDA”), savings, and certificates of deposit accounts (“CD”), as well as safe deposit boxes, travelers’ checks, money orders, foreign exchange services, and cashiers checks. PCBNA offers a wide range of wealth management services through the Wealth Management segment which includes two wholly-owned subsidiaries, Morton Capital Management (“MCM”) and R.E. Wacker and Associates (“REWA”).

PCBNA conducts its banking services under five brand names: Santa Barbara Bank & Trust (“SBB&T”), First National Bank of Central California (“FNB”), South Valley National Bank (“SVNB”), San Benito Bank (“SBB”) and First Bank of San Luis Obispo (“FBSLO”). Banking offices are located in eight counties in the central coast of California from Los Angeles to Santa Clara.

Basis of Presentation

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and conform to practices within the financial services industry. The accounts of the Company and its consolidated subsidiaries are included in these Consolidated Financial Statements. All significant intercompany balances and transactions have been eliminated.

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with GAAP. The preparation of financial statements in conformity to GAAP requires management to make estimates and assumptions that affect the amount of assets and liabilities as well as disclosures of contingent assets and liabilities at the date of the financial statements. Although Management believes these estimates to be reasonably accurate, actual amounts may differ. In the opinion of Management, all adjustments considered necessary have been reflected in the financial statements during their preparation. The results of operations in the interim Consolidated Financial Statements do not necessarily indicate the financial results for the entire year.

Certain amounts in the 2007 financial statements have been reclassified to be comparable with classifications used in the 2008 financial statements.

Consolidation of Subsidiaries

PCB has five wholly-owned subsidiaries. PCBNA, a banking subsidiary and four unconsolidated subsidiaries used as business trusts in connection with issuance of trust-preferred securities as described in Note 14, “Long-term Debt and Other Borrowings” in the 2007 10-K.

PCBNA has four wholly-owned consolidated subsidiaries:

•

MCM and REWA, two registered investment advisors that provide investment advisory services to individuals, foundations, retirement plans and select institutional clients.

•

SBBT RAL Funding Corp. which is utilized as part of the financing of the RAL program as described in Note 8, “RAL and RT Programs”.

•

PCB Service Corporation, utilized as a trustee of deeds of trust in which PCBNA is the beneficiary.

PCBNA also retains ownership in several low-income housing partnerships that generate tax credits. These partnerships are considered variable interest entities and are not consolidated into these Consolidated Financial Statements.

Segments

GAAP requires that the Company disclose certain information related to the performance of its business segments. Business segments are defined based on how the Chief Executive Officer of the Company views the Company’s operations. Based on these guidelines, the Company’s Management has determined that there are four operating segments: Community Banking, Commercial Banking, RAL and RT Programs and Wealth Management. The All Other segment consists of the administrative support units and the Holding Company. The factors used in determining these reportable segments are defined in Note 24, “Segments” in the Consolidated Financial Statements of the 2007 10-K.

During the third quarter of 2008, the Company reviewed its goodwill for impairment in accordance with SFAS 142, Goodwill and Other Intangible Assets (“SFAS 142”). Due to the reorganization of the Company’s segments in December 2007 as disclosed in Note 24, “Segments” of the 2007 10-K, the Company was required to re-allocate goodwill based on the fair value of each segment at December 31, 2007. Prior to determining the fair value of each segment, the Company was required to determine the carrying value of each segment. In order to determine the carrying value of each segment, a majority of the assets held by the All Other segment were re-allocated to the Community Banking, Commercial Banking, RAL and RT Programs and Wealth Management segments. The income statement impact from the re-allocation is disclosed in the net credit (charge) for funds line item of the segment reporting tables.

SIGNIFICANT ACCOUNTING POLICIES

Except as noted below, the significant accounting policies have not changed from those described in Note 1, “Summary of Significant Accounting Policies” in the Consolidated Financial Statements of the 2007 10-K.

New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The Company adopted SFAS 157 on January 1, 2008. There was no financial impact to the Consolidated Financial Statements upon adoption. For additional information on the fair value of certain financial assets and liabilities, see Note 13, “Fair Value of Financial Instruments” of these Consolidated Financial Statements on page 28.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows the Company an irrevocable election to measure certain financial assets and liabilities at fair value, with unrealized gains and losses on the elected items recognized in earnings at each reporting period. The fair value option (“FVO”) may only be elected at the time of initial recognition of a financial asset or financial liability or upon the occurrence of certain specified events. The election is applied on an instrument by instrument basis, with a few exceptions, and is applied only to entire instruments and not to portions of instruments. SFAS 159 also provides expanded disclosure requirements regarding the effects of electing the fair value option on the financial statements. The Company did not elect the adoption of SFAS 159 for any of its existing financial assets or liabilities as of January 1, 2008. In the subsequent event footnote of the first quarter Form 10-Q, the Company disclosed its intent to elect the FVO for certain Federal Home Loan Bank (“FHLB”) advances. However, the Company has since determined that it is unable to obtain the necessary inputs for the selected liabilities on a consistent and repeatable basis since they are unique and not from active markets. As such, the Company has not fair valued any of its FHLB advances.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”) and SFAS No. 160, “Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”). SFAS 141(R) is required to be adopted concurrently with SFAS 160 and is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. This will be effective for the Company for the calendar year beginning January 1, 2009. SFAS 141(R) and SFAS 160 are effective prospectively; however, the reporting provisions of SFAS 160 are effective retroactively. The Company does not currently have any Business Combinations scheduled to close on or after December 15, 2008. With regard to SFAS 160, the Company’s only consolidated subsidiaries are all wholly-owned by the Company or by another subsidiary. Management does not anticipate that there will be a material impact on the Company’s financial condition or results of operations from adoption of these accounting pronouncements.

2. MERGERS AND ACQUISITIONS

On January 4, 2008, PCBNA acquired the assets of REWA, a San Luis Obispo, California-based registered investment advisor which provides personal and financial investment advisory services to individuals, families and fiduciaries. On the date of purchase, REWA managed assets of $464.1 million. PCBNA initially paid $7.0 million for substantially all of the assets and liabilities of REWA (with an additional contingent payment due five years after the purchase date) and formed a new wholly-owned subsidiary of PCBNA by the same name. As a result of the acquisition of REWA, the Company recorded $4.2 million of goodwill and $2.8 million of other intangible assets. The goodwill associated with the purchase of REWA will be reviewed annually for impairment. The other intangible assets will be amortized over their individual expected lives and analyzed quarterly for impairment. The clients of REWA will continue to be served by the same principal and support staff. The Company has not disclosed pro forma financial information for this purchase as this acquisition was not material to the Company as a whole.

3. EARNINGS PER SHARE

The following table presents a reconciliation of basic earnings per share and diluted earnings per share. The denominator of the diluted earnings per share includes the effect of dilutive stock options and restricted stock option grants.


	Three-Months Ended September 30,					Nine-Months Ended September 30,
	*2008 (a)*			*2007*		*2008*		*2007*
	(in thousands, except per share amounts)
Basic weighted average shares outstanding		46,197			46,945		46,169		46,971
Dilutive effect of stock options		427			234		357		273

Diluted weighted average shares outstanding		46,624			47,179		46,526		47,244

Diluted Earnings Per Share	$	(1.03	)	$	0.08	$	0.41	$	1.88

(a)	Diluted Earnings Per Share for the three-months ended September 30, 2008 is calculated using basic weighted average shares outstanding.

For the three months ended September 30, 2008 and 2007, the average outstanding unexercised stock options of 1.4 million and 1.0 million shares, respectively, were not included in the computation of earnings per share because they were antidilutive. For the nine months ended September 30, 2008 and 2007, the average outstanding unexercised stock options of 1.3 million and 942,000 shares, respectively, were not included in the computation of earnings per share because they were antidilutive.

4. SECURITIES

The amortized cost and estimated fair value of investment securities was as follows:


	*September 30, 2008*
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			*Fair Value*
	(in thousands)
Trading Securities:
Mortgage-backed securities (3)	$	202,557	$	—	$	—		$	202,557

Total		202,557		—		—			202,557

Available-for-Sale:
U.S. Treasury obligations (1)		26,367		306		—			26,673
U.S. Agency obligations (2)		436,345		1,046		(2,229	)		435,162
Collateralized mortgage obligations		21,330		66		(1,210	)		20,186
Mortgage-backed securities (3)		212,621		3,225		—			215,846
Asset-backed securities		1,963		—		(395	)		1,568
State and municipal securities		292,303		8,915		(10,570	)		290,648

Total		990,929		13,558		(14,404	)		990,083

Total Securities	$	1,193,486	$	13,558	$	(14,404	)	$	1,192,640


	*December 31, 2007*
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			*Fair Value*
	(in thousands)
Trading Securities:
Mortgage-backed securities (3)	$	146,862	$	—	$	—		$	146,862

Total		146,862		—		—			146,862

Available-for-Sale
U.S. Treasury obligations (1)		39,803		194		—			39,997
U.S. Agency obligations (2)		477,281		2,284		(75	)		479,490
Collateralized mortgage obligations		23,838		120		(97	)		23,861
Mortgage-backed securities (3)		382,003		940		—			382,943
Asset-backed securities		2,194		4		—			2,198
State and municipal securities		222,705		26,300		(607	)		248,398

Total		1,147,824		29,842		(779	)		1,176,887

Total Securities	$	1,294,686	$	29,842	$	(779	)	$	1,323,749

(1)	U.S. Treasury obligations are securities that are backed by the full faith and credit of the United States government.

(2)	U.S. Agency obligations are general obligations that are not backed by the full faith and credit of the United States government. They consist of obligations of Government Sponsored Enterprises issued by the Federal Farm Credit Banks, Federal Home Loan Banks, and Tennessee Valley Authority.

(3)

Mortgage-backed securities are securitized mortgage loans that are not backed by the full faith and credit of the United States Government. They consist of obligations of Government Sponsored Enterprises which guarantee the collection of principal and interest payments. The securities primarily consist of securities issued by Federal Home Loan Mortgage Corporation and Federal National Mortgage Association.

Trading Securities

At September 30, 2008, the Company held $202.6 million of trading securities, an increase of $55.7 million since December 31, 2007. This increase was primarily from $213.4 million of Mortgage Backed Securities (“MBS”) purchases during 2008 which were reduced by $146.7 million of MBS sales and $12.6 million of principal pay downs during 2008. For the three and nine months ended September 30, 2008, the market value of the securities held in the trading portfolio increased by $513,000 and $1.6 million, respectively. The valuation change was recorded in non-interest income.

In January 2008, $146.7 million of fixed rate MBS trading securities held at December 31, 2007 were sold and a gain on sale of $2.3 million was recognized during the first quarter of 2008. On January 4, 2008, the Company transferred $67.6 million of residential real estate loans to securities which are currently held in the trading portfolio and included in the $213.4 million of purchases during 2008 disclosed above.

Available for Sale (“AFS”) Securities

At September 30, 2008, the Company held $990.1 million of AFS Securities, a decrease of $186.8 million since December 31, 2007. A majority of this decrease was due to sales, maturities and calls of securities of $447.3 million, a decrease in mark to market valuations of $29.9 million offset by purchases of $331.5 million.

As disclosed in Note 4, “Securities” of the Consolidated Financial Statements in the 2007 10-K, in the fourth quarter of 2007, Management changed its intent with regard to holding its AFS MBS until maturity or ultimate recovery. As a result, the Company recognized $797,000 and $4.2 million of additional impairment loss for the three and nine month periods ended September 30, 2008, respectively, after recognizing a $3.0 million impairment loss at December 31, 2007. Management has not changed its intent with respect to the remainder of the securities held in the AFS portfolio and has the ability to hold them.

During the third quarter of 2008, the Company entered into $50.0 million of treasury future contracts. The Company entered into these future contracts to assist with offsetting the impairment losses incurred on the MBS AFS portfolio. During the third quarter of 2008, the Company recorded $139,000 of losses associated with these future contracts. These losses are included in the income statement within the line item, Net gain (loss) on securities transactions.

The AFS securities that are in an unrealized loss position and temporarily impaired as of September 30, 2008 and December 31, 2007 are shown in the following table:


	*September 30, 2008*
	*Less than 12 months*					*12 months or more*					*Total*
	*Fair Value*		Unrealized Loss			*Fair Value*		Unrealized Loss			*Fair Value*		Unrealized Loss
	(in thousands)
US Treasury/US agencies	$	197,454	$	(2,229	)	$	—	$	—		$	197,454	$	(2,229	)
Municipal bonds		144,728		(9,728	)		5,938		(842	)		150,666		(10,570	)
Collateralized mortgage obligations		10,647		(936	)		3,672		(274	)		14,319		(1,210	)
Asset backed securities		1,568		(395	)		—		—			1,568		(395	)

Total	$	354,397	$	(13,288	)	$	9,610	$	(1,116	)	$	364,007	$	(14,404	)


	*December 31, 2007*
	*Less than 12 months*					*12 months or more*					*Total*
	*Fair Value*		Unrealized Loss			*Fair Value*		Unrealized Loss			*Fair Value*		Unrealized Loss
	(in thousands)
US Treasury/US agencies	$	24,999	$	(1	)	$	64,044	$	(74	)	$	89,043	$	(75	)
Municipal bonds		12,361		(361	)		12,877		(246	)		25,238		(607	)
Collateralized mortgage obligations		—		—			4,131		(97	)		4,131		(97	)

Total	$	37,360	$	(362	)	$	81,052	$	(417	)	$	118,412	$	(779	)

The $14.4 million and $779,000 of unrealized losses for the AFS portfolio as of September 30, 2008 and December 31, 2007, respectively, are a result of market interest rate fluctuations. The issuers of these securities have not, to the Company’s knowledge, established any cause for default on these securities and the most recent ratings on all securities are investment grade. Management is aware of one Asset Backed Security (“ABS”) with a fair value of $1.6 million held in the AFS portfolio that has some sub-prime home equity loans as the underlying collateral. The ABS currently has an investment rating of AAA and is fully collateralized. The Company has the ability and the intent to hold these securities until ultimate recovery or maturity. As such, Management does not believe that there are any securities that are other-than-temporarily impaired as of September 30, 2008 other than the MBS portfolio as discussed above.

The fair value is based on current market prices obtained from independent sources for each security held. All securities in an unrealized loss position for more than 12 months are evaluated for other than temporary impairment quarterly.

Interest Income

Interest income for trading and AFS securities on a FTE basis was $15.9 million and $12.4 million for the three month periods ended September 30, 2008 and 2007, respectively. The taxable and non-taxable interest income for the comparable three month periods of September 30, 2008 and 2007 were: taxable interest income of $11.1 million and $8.9 million for the comparable periods and, non-taxable interest income of $4.8 million and $3.5 million.

Interest income for trading and AFS securities on a FTE basis was $47.4 million and $39.6 million for the nine month periods ended September 30, 2008 and 2007, respectively. The taxable and non-taxable interest income for the comparable nine month periods of September 30, 2008 and 2007 were: taxable interest income of $33.9 million and $27.9 million for the comparable periods and, non-taxable interest income of $13.4 million and $11.7 million.

5. LOANS

The composition of the Company’s loans held for investment portfolio is as follows:


	September 30, 2008		December 31, 2007
	(in thousands)
Real estate:
Residential—1 to 4 family	$	1,100,608	$	1,075,663
Multi-family residential		265,261		278,935
Commercial		1,929,225		1,558,761
Construction		605,563		651,307
Commercial loans		1,194,805		1,196,808
Home equity loans		426,921		394,331
Consumer loans		196,164		200,094
RALs		1,600		—
Other loans		2,067		3,257

Total loans		5,722,214		5,359,156
Allowance for loan losses		122,097		44,843

Net loans	$	5,600,117	$	5,314,313

Total loans are net of deferred loan origination, commitment and extension fees and origination costs of $6.9 million as of September 30, 2008 and $6.9 million as of December 31, 2007.

Loans Held for Sale

At September 30, 2008, the Company held $145.4 million of loans held for sale. All of the loans classified as loans held for sale at September 30, 2008 were sold or transferred during October 2008. The loans classified as held for sale were $88.2 million of residential loan sales, $22.6 million of SBA loans and $10.5 million of residential loans which were transferred to securities. Also included in loans held for sale were $24.0 million of loans sold in conjunction with the sale of the Santa Paula and Harvard branches transaction. As disclosed in Note 16, “Subsequent Events”, the Company increased the amount of loans sold in conjunction with the Santa Paula and Harvard branch sale after the preparation of September 30, 2008 financial statements.

At December 31, 2007, the Company held $68.3 million of residential real estate loans as held for sale which were transferred to securities in January 2008.

Impaired Loans

The following table reflects recorded investment in impaired loans:


	September 30, 2008			December 31, 2007
	(in thousands)
Impaired loans with specific valuation allowance	$	31,916		$	51,998
Valuation allowance related to impaired loans		(7,756	)		(3,944	)
Impaired loans without specific valuation allowance		99,322			6,171

Impaired loans, net	$	123,482		$	54,225

A valuation allowance is established for an impaired loan when the fair value of the loan is less than the recorded investment. In certain cases, portions of impaired loans are charged-off to realizable value instead of establishing a valuation allowance as identified in the table above as “Impaired loans without specific valuation allowance”. The valuation allowance disclosed above is included in the allowance for loan losses reported in the balance sheets as of September 30, 2008 and December 31, 2007.

The table below reflects the average balance and interest recognized for impaired loans for the three and nine month periods ended September 30, 2008 and 2007.


	*Three-Months* *Ended September 30,*				Nine-Months Ended September 30,
	*2008*		*2007*		*2008*		*2007*
	(in thousands)
Average investment in impaired loans for the period	$	134,029	$	10,255	$	120,732	$	11,343
Interest recognized during the period for impaired loans	$	2,886	$	453	$	7,876	$	977

The increase in the average balance of impaired loans during the three and nine month periods ended September 30, 2008 compared to the same periods in 2007 is primarily due to the deterioration of six sizable customer relationships, five of these relationships are in residential loan construction and one commercial loan (auto parts) which account for approximately 69% of the impaired loans disclosed above.

Refund Anticipation Loans

Information and disclosures related to RALs and the securitization of RALs are included in Note 8, “RAL and RT Programs” of these Consolidated Financial Statements.

Pledged Loans

At September 30, 2008 and December 31, 2007, loans secured by first trust deeds on residential and commercial property with principal balances totaling $1.06 billion and $977.4 million, respectively, were pledged as collateral to the Federal Reserve Bank of San Francisco (“FRB”); and $2.91 billion and $3.10 billion, respectively, were pledged to the Federal Home Loan Bank (“FHLB”). The amount of loans pledged does not represent the amount of outstanding borrowings at the FRB or the FHLB. The Company pledges loans as collateral for the Company’s borrowings in accordance with the Company’s agreements with the FRB and the FHLB.

Letters and Lines of Credit

In order to meet the financing needs of its customers in the normal course of business, the Company is a party to financial instruments with “off-balance sheet” risk. Among these financial instruments are commitments to extend credit and standby letters of credit.

The following table represents the contractual commitments for lines and letters of credit as of September 30, 2008:


	*September 30, 2008*
	*Total*		Less than one year		One to three years		Three to five years		More than five years
	(in thousands)
Commercial lines of credit	$	638,264	$	366,352	$	112,609	$	69,664	$	89,639
Consumer lines of credit		351,554		3,124		13,148		43,742		291,540
Standby letters of credit and financial guarantees		123,766		49,213		25,925		18,105		30,523

Total	$	1,113,584	$	418,689	$	151,682	$	131,511	$	411,702

The Company has recorded a $342,000 liability associated with the unearned portion of the letter of credit fees for these guarantees as of September 30, 2008 compared to $382,000 at December 31, 2007.

The Company has exposure to loan losses from unfunded loan commitments and letters of credit. As funds have not been disbursed on these commitments, they are not reported as loans outstanding. Loan losses related to these commitments are not included in the allowance for loan losses reported in Note 7, “Allowance for Loan Losses” of this Form 10-Q and are accounted for as a separate loss contingency as a liability. This loss contingency for the unfunded loan commitments and letters of credit was $7.1 million at September 30, 2008, an increase of $6.0 million since December 2007. The increase in the reserve for off balance sheet commitments is discussed on page 48 of this Form 10-Q. Changes to this liability are adjusted through other non-interest expense.

The table below summarizes the activity for this loss contingency:


	Three-Months Ended September 30,					Nine-Months Ended September 30,
	*2008*		*2007*			*2008*		*2007*
	(in thousands)
Beginning balance	$	4,377	$	1,169		$	1,107	$	1,448
Additions, net		2,746		(155	)		6,016		(434	)

Balance	$	7,123	$	1,014		$	7,123	$	1,014

6. LOAN SALES AND TRANSACTIONS

RALs

The Company sold $2.11 billion and $1.69 billion of RALs into a securitization facility through SBBT RAL Funding Corp. during the first quarters of 2008 and 2007, respectively. The net gain on sale of RALs for the nine months ended September 30, 2008 and 2007 was $44.6 million and $41.8 million, respectively. A detailed description of RALs sold through the securitization is discussed in Note 8, “RAL and RT Programs” of these Consolidated Financial Statements. The income generated by the sale of RALs is reported in the RAL and RT segment.

Residential Real Estate Loans

During the third quarter of 2008, the Company decided to sell a select portion of the residential loan portfolio. During September 2008, $10.9 million of residential mortgage loans were sold for a net gain on sale of $106,000 which was recognized in other income. Of the $10.9 million of residential loans sold, $9.4 million of loans were sold with servicing retained. A nominal servicing right was recorded.

On January 4, 2008, the Company converted $68.2 million of adjustable rate residential real estate loans from the Community Banking segment to MBS held in the Company’s trading portfolio with a discounted par amount of $67.6

million. The Company retained the servicing on the loans sold at a rate of 25 basis points and recognized a servicing right of $402,000. Any resulting gain or loss for this transaction will be realized by the Company when the securities received in the conversion are sold.

SBA Loans

The Company occasionally sells the guaranteed portion of selected SBA 7(a) loans into the secondary market, on a servicing retained basis. During the third quarter of 2008, the Company sold $18.0 million of the guaranteed portion of selected SBA 7(a) loans for a premium. The Company recorded servicing rights of $255,000 and a net gain on loan sales of $757,000. The SBA lending activities are included in the Commercial Banking segment.

7. ALLOWANCE FOR LOAN LOSSES

The following summarizes the changes in the allowance for loan losses:


	Three-Months Ended September 30,						Nine-Months Ended September 30,
	*2008*			*2007*			*2008*			*2007*
	(in thousands)
Balance, beginning of period	$	73,288		$	43,549		$	44,843		$	64,671
Loans charged-off:
RALs		—			(25,386	)		(53,752	)		(116,726	)
Core Bank Loans		(20,010	)		(4,047	)		(53,861	)		(25,297	)

Total Loans charged-off		(20,010	)		(29,433	)		(107,613	)		(142,023	)

Recoveries on loans previously charged-off:
RALs		3,697			1,010			31,035			22,764
Core Bank Loans		1,925			848			5,074			6,131

Total recoveries on loans previously charged -off		5,622			1,858			36,109			28,895

Net charge-offs		(14,388	)		(27,575	)		(71,504	)		(113,128	)

Provision for loan losses:
RALs		(3,697	)		22,383			22,717			93,960
Core Bank Loans		67,659			2,018			126,806			14,534

Total provision for loan losses		63,962			24,401			149,523			108,494

Adjustments from loan sales		(765	)		—			(765	)		(19,662	)

Balance, end of period	$	122,097		$	40,375		$	122,097		$	40,375

The allowance for loan losses increased by $81.7 million when comparing the balance at September 30, 2008 to September 30, 2007. This increase is mostly due to the inherent loan losses in the Core Bank loan portfolio associated with the economic downturn. The discussion surrounding the causes for this increase are discussed in more detail within the Management Discussion & Analysis (“MD&A”), Provision for Loan Losses and Allowance for Loan Losses section which starts on page 45 of this Form 10-Q.

The allowance and provision for loan losses for the RAL program is discussed in Note 8, “RAL and RT Programs” of these Consolidated Financial Statements.

8. RAL AND RT PROGRAMS

RAL and RT Programs

The Company sells two products related to the electronic filing of tax returns. The products are designed to provide taxpayers with safer and faster access to funds claimed by them as a refund on their tax returns. This access may be in the form of a loan—a RAL—from the Company secured by the refund claim or in the form of a facilitated electronic transfer or check prepared by their tax preparer—an RT. The RAL and RT Programs are highly seasonal. Approximately 90% of the activity occurs in the first quarter of each year. For additional financial information on the RAL and RT programs for the comparable periods see the discussion below and, Note 7, “RAL and RT Programs” of the Consolidated Financial Statements of the 2007 10-K.

Refund Anticipation Loans

RALs are short-term consumer loans offered to taxpayers, secured by their anticipated tax refund and subject to an underwriting process prior to approval. At the request of the taxpayer, the refund claim is paid by the Internal Revenue Service (“IRS”) to the Bank once the tax return has been processed. This constitutes the source of repayment of the RAL. Funds received from the IRS above the sum of the RAL less associated contractual fees are remitted to the taxpayer by the Bank.

The RAL funds advanced by the Bank are generally repaid by the IRS within several weeks. Therefore, the processing costs and provision for loan loss represent the major costs of these loans. This cost structure is different than for other loans since usually the cost of funds is the major cost for the Company in making a loan. Because of their short duration, the Bank cannot recover the processing costs through interest collected over the term of the loan. Consequently, the Bank has structured the fees to have a fixed component to cover processing costs and a variable component to cover loan losses and the cost of funds. The customer signs a promissory note which requires the Company to report fees received for RALs as interest income.

Net interest income for RALs for the nine month periods ended September 30, 2008 and 2007 was $103.4 million and $106.8 million, respectively. As discussed above, approximately 90% of the activity occurs in the first quarter each year.

The following table represents RAL originations and net charge-offs:


	Nine-Months Ended September 30,
	*2008*			*2007*
	(in thousands)
Originations:
RAL loans retained	$	4,572,058		$	4,150,305
RAL loans securitized		2,205,130			1,694,489

Total RAL loans	$	6,777,188		$	5,844,794

Loan losses:
Charge-offs of retained RALs, net	$	(22,717	)	$	(93,960	)
Charge-offs of securitized RALs, net		(14,914	)		(14,189	)

Total RAL program losses, net	$	(37,631	)	$	(108,149	)

In 2007 and prior, any RAL balance for which repayment had not been received by the end of the year was charged off. Therefore, no RALs are reported as of December 31 each year. At September 30, 2008, the outstanding RAL balance was $1.6 million. This balance was subsequently collected during October 2008.

Fees Earned on RALs and RTs

Income from the RAL/RT Programs consists of the fees earned on these products. Fees earned on RALs are reported in interest income while fees earned on RTs are reported in non-interest income. The Company originates these products through three channels: Jackson Hewitt, other professional tax preparers and self filers. Regardless of the program a basic fee per product is charged. The fees charged for the products differ by source due to varying contractual terms. A description of the different fee structures is provided as follows:

Jackson Hewitt (“JH”): Fees charged on RALs offered through JH include an account handling fee and a finance charge equaling a percentage of the loan amount subject to a maximum and minimum. The RT fee is a fixed amount. The amount of fees is not impacted by the amount of charge-offs related to RALs that were originated by JH.

Other Professional Tax Preparers (“PRO”): Fees charged on RALs offered through other professional tax preparers include an account handling fee and a flat fee based on certain tiered loan amounts. The RT fee is a fixed amount.

Self Filers (“PER”): Fees charged on RALs offered through websites used by self filers include a flat fee for certain tiered loan amounts. The RT fee is a fixed amount. The fees charged for RALs varied as each website used by self filers had a different fee structure.

The following table summarizes RAL and RT fees:


	Three-Months Ended September 30,						Nine-Months Ended September 30,
	*2008*			*2007*			*2008*			*2007*
	(dollars in thousands)
RAL Fees:
Total RAL Fees	$	—		$	79		$	108,762		$	117,758
% of Total Fees		0	%		18	%		61	%		72	%

RT Fees:
Total RT Fees	$	385		$	370		$	68,576		$	45,756
% of Total Fees		100	%		82	%		39	%		28	%

Total Fees	$	385		$	449		$	177,338		$	163,514

Total RT transactions increased by 1.5 million or 30.8% from 4.8 million for the nine months ended September 30, 2007 to 6.3 million for the nine months ended September 30, 2008. Implementation of new credit risk management controls resulted in an increased number of RAL customer applications that were declined which then converted to an RT, causing the $22.8 million increase in RT fees for the nine month period ending September 30, 2008 compared to September 30, 2007.

Refund Anticipation Loan Securitizations

Securitization Facility: One source of external funds the Company uses to extend RALs to customers is a securitization facility. If the securitization facility was not in place during the peak period of the RAL season, the amount of the RALs outstanding would result in unacceptable capital ratios for PCBNA. The securitization facility provides funds for lending and restores PCBNA’s capital to an acceptable level since the facility removes some of the RALs from the balance sheet. By the end of February, for each RAL year, the balance of RALs is low enough so RAL sales, through the securitization, are no longer necessary. Individual RALs are each of a relatively small amount (approximately $3,300 per RAL for the 2008 season), therefore, a securitization is the most efficient method to accomplish the sale of RALs. The RAL securitization occurs during the first quarter of each year and does not remain at the end of any reporting period. The 2008 and 2007 securitization facility was terminated on February 22 and February 23, respectively.

The Company has utilized a securitization of RALs for the last six years. In 2008, the maximum amount of the securitization was set at $1.60 billion compared to $1.50 billion in 2007. The capacity has increased each year to accommodate the increased RAL volume.

Securitization Operations: The securitization is managed by a primary bank, termed the “agent bank”, and several other participating banks. Each of the banks, agent and participating, are allocated a certain proportion of the RALs sold by the Bank. The agent and participating banks may purchase their allocated loans directly for their own portfolio or they may have their allocation purchased by subsidiary entities called conduits. These conduits purchase assets from a number of financial institutions, RALs purchased from the Bank being just one class of assets. The conduits fund their asset purchases through the issuance of commercial paper and are referred to as multi-seller commercial paper funding conduits.

With each sale of RALs from the Company to SBBT RAL Funding Corp., an investment request is submitted to the agent bank. If approved, undivided ownership interests in the RALs will be purchased by agent and participating banks or their multi-seller commercial paper funding conduits, without recourse.

Each purchase is made at 95% of the amount of the RALs net of the deferred fees so that a 5% over-collateralization exists for the benefit of the investors. The Bank is required to remit to the investors in the securitization cash received from the IRS up to the 95% amount. Payments received in excess of the 95% figure are retained by the Bank.

The 2008 securitization facility was terminated on February 22, 2008. The 2008 securitization facility has similar terms to the 2007 securitization facility and was entered into on December 19, 2007 for the 2008 RAL season. As of September 30, 2008 and December 31, 2007, there were no borrowings outstanding under the securitization facility.

Fees paid associated with the securitization facility include an administrative agent fee payable to the lead bank, an upfront fee, a commitment fee and a usage fee applied against the average balance of advances. There are no retained interests or servicing rights at March 31 of any year, or during any subsequent reporting period.

Repurchase of Securitized Loans: While there is no requirement that SBBT RAL Funding Corp. repurchase RALs other than those that did not meet the underwriting criteria in the purchase agreement, under SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”), the seller may repurchase a minimal amount of loans as part of a “clean-up call” to close the transaction. In practice, all loans sold into the securitization are either fully repaid or repurchased by SBBT RAL Funding Corp. at the termination of the securitization in mid-February of each calendar year consistent with the terms of the Securitization Agreement. At the close of the securitization, the Company repurchased $20.9 million and $31.8 million of RALs in February 2008 and 2007, respectively, at the close of the securitization at fair value.

A majority of the RALs repurchased from the securitization are collected or charged-off before the end of the first quarter. In 2008, all repurchased RALs that remained uncollected at March 31, 2008 were deemed uncollectible and charged-off in the amount of $14.9 million as a reduction to the gain on sale of RALs.

In prior years, repurchased RALs outstanding at the end of the first quarter that were evaluated as collectible were reported on the balance sheet as RALs. Recoveries on repurchased RALs above the estimate at March 31, 2007 were accounted for as recoveries through the allowance for loan losses. Charge-offs of these RALs over the amount estimated, taken in subsequent quarters, were accounted for as losses taken against the allowance for loan losses.

Calculation of the Gain on Sale of RALs: The gain on sale from the RAL securitization is calculated by reference to the securitization-related cash flows received and paid. Because the securitization is active only within the first quarter of each year, there is no present value discounting of the cash flows. The cash flows involved in the securitization are as follows:

(1)

Cash received from the investors for the principal amount of the loans less the discount for the credit enhancement;

(2)

Cash received from the IRS for the amount of the refund and paid to the investors;

(3)

Cash paid to the investors for the commitment and funding fees;

(4)

Cash paid to the investors to repurchase outstanding loans at the termination of the securitization as a “cleanup call”, and

(5)

Cash received from the IRS subsequent to the termination of the securitization representing collections on the repurchased loans.

During the term of the securitization, more cash is received from the IRS for customer refunds than is paid to the investors by the amount of the discount for the credit enhancement that includes the finance charge or fee paid by the RAL customer for the loan which is not sold into the securitization. In the table below, this excess is reported as RAL fees received on securitized loans. In the calculation of the net gain on sale of RALs, the RAL fees received on securitized loans are reduced by the direct costs of the securitization (fees paid to investor, commitment fees paid and other fees paid) and loan losses as summarized in the table below.

The table below summarizes the gain on sale of RALs sold into the securitization:


	Nine-Months Ended September 30,
	*2008*			*2007*
	(in thousands)
RAL fees received on securitized loans	$	64,123		$	59,969
Fees paid to investor		(2,176	)		(2,118	)
Commitment fees paid		(2,320	)		(1,575	)
Other fees paid		(133	)		(265	)
Loan losses		(14,914	)		(14,189	)

Net gain on sale of RALs	$	44,580		$	41,822

RAL Allowance and Provision for loan losses

The Company follows the same policies for charging-off RALs regardless of whether the RAL had been securitized or not. All outstanding RALs were charged-off at September 30, 2008 for the current RAL season except for $1.6 million of RALs which were subsequently collected.

RAL provision for loan losses was ($3.7) million and $22.4 million for the three months ended September 30, 2008 and 2007, respectively. For the nine months ended September 30, 2008 and 2007 RAL provision for loan losses was $22.7 million and $94.0 million, respectively. The decreased provision for loan losses on RALs for the comparable periods is due to the enhanced credit risk controls implemented by the Bank. Additionally, starting in 2008, the Company is no longer offering the RAL pre-file loan product due to high loss rates experienced in the past. The Company’s decision to eliminate the pre-file product in 2008 and the credit risk controls both contributed to the lower loan loss rate.

Losses associated with RALs result from the IRS not remitting funds associated with a particular tax return. This occurs for a number of reasons, including errors in the tax return and tax return fraud.

Refund Transfer Fees

Fees earned on RTs are recognized in non-interest income as a separate line item, “Refund transfer fees”. RT fees earned for the three month periods ended September 30, 2008 and 2007 were $385,000 and $370,000, respectively. RT fees earned for the nine month periods ended September 30, 2008 and 2007 were $68.6 million and $45.8 million, respectively. The increase in RT fees was the result of increased volumes for the comparable quarters.

9. LONG-TERM DEBT AND OTHER BORROWINGS

The following table is a summary of long-term debt and other borrowings:


	September 30, 2008		December 31, 2007
	(in thousands)
Other short-term borrowings:
Amounts due to the Federal Reserve Bank	$	5,684	$	106,247
Federal Home Loan Bank advances		110,000		—

Total short-term borrowings		115,684		106,247

Long-term debt:
Federal Home Loan Bank advances		1,345,006		1,099,126
Subordinated debt issued by the Bank		121,000		121,000
Subordinated debt issued by the Company		69,427		69,537

Total long-term debt		1,535,433		1,289,663

Total long-term debt and other short-term borrowings		1,651,117		1,395,910

Obligation under capital lease		9,869		9,692

Total long-term debt and other borrowings	$	1,660,986	$	1,405,602

Other Short-Term Borrowings

Other short-term borrowings include treasury tax and loans (“TT&Ls”) with the FRB and short term advances with the FHLB. TT&Ls are obtained through the FRB’s Term Investment Option (“TIO”) program. The TIO is an investment opportunity offered to participants that have treasury tax and loans with the FRB. Included within the TT&L amounts are payroll deposits made by employers to PCBNA for eventual payment to the IRS. PCBNA may hold these deposits and pay interest on them until called by the Treasury Department. For the three months ended September 30, 2008 and 2007, interest expense on short-term borrowings was $1.2 million and $2.0 million, respectively with a weighted average rate of 2.31% and 4.75%, respectively. For the nine months ended September 30, 2008 and 2007, interest expense on short-term borrowings was $2.5 million and $7.2 million, respectively with a weighted average rate of 2.27% and 4.80%, respectively.

10. POSTRETIREMENT BENEFITS

All eligible retirees may obtain health insurance coverage through the Company’s Retiree Health Plan. The Company is required to recognize its portion of the cost of the benefits as the eligible retirees earn the benefits rather than when the benefits are paid. The commitment is recognized in the financial statements. For a comprehensive explanation of these benefits see Note 15, “Postretirement Benefits” of the Consolidated Financial Statements in the 2007 10-K.

The following table summarizes the expense recognized for postretirement benefits:


	Three-Months Ended September 30,						Nine-Months Ended September 30,
	*2008*			*2007*			*2008*			*2007*
	(in thousands)
Service cost	$	294		$	346		$	881		$	1,039
Interest cost		299			280			897			839
Return on assets		(226	)		(191	)		(679	)		(574	)
Gain		126			172			380			516
Prior service cost		(161	)		(161	)		(484	)		(484	)

Total	$	332		$	446		$	995		$	1,336

At the end of each year, the Company contracts a third party to estimate the amount of the Company’s required liability for postretirement benefits and to forecast the postretirement benefit expense for the following year. As of September 30, 2008 and December 31, 2007, the Company has recorded a liability for postretirement benefits of $4.7 million and $5.6 million, respectively.

Split-Dollar Life Insurance Arrangements

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (“EITF 06-4”). EITF 06-4 requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability is based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. The Company adopted EITF 06-4 on January 1, 2008, and recorded a cumulative effect adjustment of $576,000 as a reduction of retained earnings effective January 1, 2008. On a monthly basis, the Company records the benefit expense of such insurance coverage. Benefit expense during the three and nine month periods ended September 30, 2008 were $6,000 and $18,000, respectively.

11. OTHER

INCOME AND EXPENSE

Other Income

Within the line item of other income are dividends from the Company’s required investment in the FHLB and FRB. Members of the FHLB and FRB are required to maintain investments in FHLB and FRB stock in order to borrow and transact with them. In return, members receive dividends as a return on the investments. The investment in FHLB and FRB stock are classified as other assets since these investments do not provide the owner with any control or financial interest and the investment is not transferable therefore, the dividends are classified as other income. The dividend income from FHLB and FRB were $1.3 million and $926,000 for the third quarter of 2008 and 2007, respectively and $3.4 million and $2.9 million for the nine month periods ending September 30, 2008 and 2007, respectively.

Other Expense

The following table summarizes the significant items that are included in the other expense line item of the income statement:


	Three-Months Ended September 30,					Nine-Months Ended September 30,
	*2008*		*2007*			*2008*		*2007*
	(in thousands)
Other Expense:
Software	$	4,042	$	3,437		$	13,657	$	11,446
Reserve for off balance sheet commitments		2,746		(155	)		6,016		(434	)
Accrued settlement, net		2,633		—			2,633		—
Consultants		2,122		1,996			6,173		7,734
Telephone		1,215		1,121			4,488		4,511
Developers performance fees		360		484			12,109		4,873
Other		9,923		10,529			34,646		33,894

Total	$	23,041	$	17,412		$	79,722	$	62,024

The increase in reserve for off balance sheet commitments is to cover inherent losses from binding loan commitments to the extent that they are expected to be funded, including other off-balance sheet obligations such as letters of credit, fair value swaps with commercial loan customers and commitments for lines of credit and all types of loans. Included in this reserve are the same qualitative factors as employed in the on-balance sheet allowance for loan loss methodology which is the driving factor of this increase due to the current economic conditions which are discussed further in the MD&A section of this Form 10-Q.

The accrued settlement, net, of $2.6 million relates to the lawsuit disclosed in Note 12, “Commitments and Contingencies” as the Canieva Hood and Congress of California Seniors v. Santa Barbara Bank & Trust, Pacific Capital Bank, N.A., and Jackson-Hewitt, Inc.. The amount recorded is an accrual based on a tentative settlement agreement that is subject to the execution of a definitive settlement agreement and court approval.

The increase in software expense for the nine month comparable periods is mostly attributed to depreciation expense associated with capitalized software which had not been depreciating since January 2007 which was discovered and corrected during the second quarter of 2008. Management concluded that the amount of the error and the correction was not material to the Company’s financial statements for any period presented in 2007 or 2008.

The developers performance fees of $12.1 million has increased by $7.2 million for the comparable nine month periods as a result of contractual volume incentive fees paid to tax preparers due to the increased volume for the 2008 RAL season.

All other significant changes are discussed in the MD&A, non-interest expense section beginning on page 48.

12. COMMITMENTS

AND CONTINGENCIES

Leasing of Premises

The Company leases the majority of its locations. Substantially all of these leases contain multiple renewal options and provisions for increases to lease payments. As of September 30, 2008, the minimum obligations under non-cancelable leases for the next five years and thereafter are shown in the table below. These amounts are not adjusted for the contractual obligations of sub-tenants due to the Company. Sub-tenants’ lease obligations to the Company were approximately $14.0 million at September 30, 2008. Approximately 7.4% of these payments are due to the Company over the next three years.

The following table summarizes the contractual lease obligations at September 30, 2008:


	*September 30, 2008*										December 31, 2007
	Less than one year		One to three years		Three to five years		More than five years		*Total*		December 31, 2007
	(in thousands)
Non-cancelable leases	$	11,428	$	20,325	$	14,836	$	41,355	$	87,944	$	48,612
Capital leases		426		906		906		23,469		25,707		25,965

Total	$	11,854	$	21,231	$	15,742	$	64,824	$	113,651	$	74,577

Legal Matters

The Company has been a defendant in a class action lawsuit brought on behalf of persons who entered into a refund anticipation loan application and agreement (the “RAL Agreement”) with the Company from whose tax refund the Company deducted a debt owed by the applicant to another RAL lender. The lawsuit was filed on March 18, 2003 in the Superior Court in San Francisco, California as Canieva Hood and Congress of California Seniors v. Santa Barbara Bank & Trust, Pacific Capital Bank, N.A., and Jackson-Hewitt, Inc. The Company is a party to a separate cross-collection agreement with each of the other RAL lenders by which it agrees to collect sums due to those other lenders on delinquent RALs by deducting those sums from tax refunds due to its RAL customers and remitting those funds to the RAL lender to whom the debt is owed. This cross-collection procedure is disclosed in the RAL Agreement with the RAL customer and is specifically authorized and agreed to by the customer. The plaintiff does not contest the validity of the debt, but contends that the cross-collection is illegal and requests damages on behalf of the class, injunctive relief against the Company, restitution of sums collected, punitive damages and attorneys’ fees. Venue for this suit was changed to Santa Barbara. The Company filed an answer to the complaint and a cross complaint for indemnification against the other RAL lenders. On May 4, 2005, a superior court judge in Santa Barbara granted a motion filed by the Company and the other RAL lenders, which resulted in the entry of a judgment in favor of the Company dismissing the suit.

The plaintiffs filed an appeal. On September 29, 2006, the Court of Appeal, in a 2-1 decision, issued an opinion which held that the claims in the Complaint that the Company had violated certain California consumer protection laws were not preempted by Federal law and regulations. The Company and the Cross-Defendants filed a petition for writ of certiorari with the United States Supreme Court seeking to reverse the Court of Appeal’s opinion. The petition was denied.

The plaintiff filed an amended complaint in the superior court. The Company filed a demurrer to the cause of action in the amended complaint based on the California Consumers Legal Remedies Act. The superior court granted the demurrer without leave to amend. The plaintiff’s petition for writ of mandate seeking to reverse the superior court’s decision was denied by the Court of Appeal. The plaintiff filed an appeal to the California Supreme Court which was denied.

A Sixth Amended Complaint was filed which added an additional plaintiff, Tyree Bowman. The Company filed an answer to the complaint.

The plaintiff, the Company, the other defendant and the cross-defendants have tentatively reached agreement to settle the case. The tentative settlement is subject to the execution of a definitive settlement agreement and court approval. If a final judgment is ultimately entered which is consistent with the tentative agreement, it will not have a material effect on the Company’s financial position, results of operation or cash flow.

The Company is a defendant in two class actions which were both filed on January 14, 2008. Big Sky Ventures I, LCC, et al v. Pacific Capital Bancorp, et al was filed in the United States District Court, Central District of California. Joseph D. Irlanda v. Pacific Capital Bancorp, et al was filed in the Superior Court of California, County of Los Angeles.

In Big Sky Ventures, the plaintiffs purport to represent a class consisting of all tax preparation franchisees of Jackson Hewitt, Inc located outside of California. In Irlanda, the plaintiff purports to represent a class consisting of all tax preparation franchisees of Jackson Hewitt, Inc located in California.

The plaintiffs in both actions entered into annual Bank Product Agreements (the “Agreement”) with the Company which gave them the right, but not the obligation, to provide to their customers certain Company financial products such as refund anticipation loans. The plaintiffs in both actions allege that prior to the Agreement with the Company applicable to the 2006 tax year, they could charge their customers fees in connection with the Company’s financial products which they provided. The plaintiffs allege that in the 2006 tax year Agreement, their fees were limited to $40 per product and that in the Agreements for the 2007 and 2008 tax years, they were prohibited from charging their customers any fee for providing them with such products. Further, they allege that in their franchise agreements with Jackson Hewitt, Inc, they are required to provide the Company’s financial products to their customers.

In each action, the plaintiffs make the following claims for relief:

A judicial declaration that the agreements applicable to the 2007 and 2008 tax years are unconscionable, void and unenforceable for economic duress, lack of consent, undue influence, and lack of consideration.

Injunctive relief prohibiting the Company from enforcing the terms of the 2008 Bank Product Agreement.

For restitution from the Company for the uncompensated services provided by the plaintiffs during the 2006, 2007 and 2008 tax years.

For rescission of the 2008 Bank Product Agreement.

For damages from the Company pursuant to California’s Unfair Competition Law under Business and Professions Code Sections 172000, et seq.

In Big Sky Ventures, the Company filed a motion to dismiss the complaint. Following a hearing on May 15, 2008, the motion was granted in part and denied in part. The judge’s order granted the motion to dismiss as to the cause of action for restitution and unjust enrichment and denied it as to the other causes of action. In addition, the order struck the plaintiffs’ requests for punitive damages and attorneys fees. The plaintiffs filed an amended complaint which added causes of action for 1) intentional interference with prospective economic advantage, 2) negligent interference with prospective advantage, and 3) quantum meruit. The Company has filed answer to the amended complaint.

In the Irlanda case, an amended complaint was filed. The Company filed a demurrer and motion to strike the amended complaint. At a hearing on September 26, 2008, the court sustained the Company’s demurrer without leave to amend 1) as to the theories of undue influence, economic duress, lack of mutual consent and lack of consideration alleged in the cause of action for injunctive relief, and 2) as to the causes of action for restitution, unjust enrichment and quantum meruit. In addition, the court granted the Company’s motion to strike as to attorneys fees, punitive damages, and all matters relating to unjust enrichment, quantum meruit, constructive trust, compensatory damages for the rescission claim, and allegations of undue influence, mutual mistake, lack of mutual consent and lack of consideration. A further court hearing is scheduled for December 5, 2008.

The Company believes that there is no merit to the claims made in these actions and intends to vigorously defend itself.

The Company is involved in various lawsuits of a routine nature that are being handled and defended in the ordinary course of the Company’s business. Expenses are being incurred in connection with defending the Company, but in the opinion of Management, based in part on consultation with legal counsel, the resolution of these lawsuits will not have a material impact on the Company’s financial position, results of operations, or cash flows.

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities. AFS and trading securities are recorded at fair value on a recurring basis. Additionally, the Company may be required to record other assets and liabilities at fair value on a non-recurring basis. These non-recurring fair value adjustments involve the lower of cost or market accounting and write downs resulting from impairment of assets.

The Company has adopted SFAS 157 effective January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:


Level 1:		Observable quoted prices in active markets for identical assets and liabilities.

Level 2:		Observable quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3:		Model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments that are recognized at fair value on a recurring and non-recurring basis:

Securities

AFS and trading securities are recorded at fair value on a recurring basis. Where quoted prices are available in an active market for identical assets, securities are classified within level 1 of the valuation hierarchy. All of our securities are quoted using observable market information for similar assets which requires the company to report and use level 2 pricing. If observable market information is not available and there is limited activity or less transparency around inputs, securities would be classified within level 3 of the valuation hierarchy.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or market. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics or based on the agreed upon sale price. As such, the Company classifies loans held for sale as a non-recurring valuation using a level 1 valuation approach. At September 30, 2008, the Company had $145.4 million of loans held for sale. All of the loans classified as loans held for sale were recorded at the lower of cost or market.

Impaired Loans

The Company records loans at fair value on a non-recurring basis. When a loan is considered impaired, an allowance for loan losses is established. SFAS 157 applies to loans measured for impairment using the practical expedients method permitted by SFAS 114, Accounting by Creditors for Impairment of a Loan. Impaired loans are measured at an observable market price or at the fair value of the loans collateral, if the loan is collateral dependent. The fair value of the loan’s collateral is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral. When the fair value of the loan’s collateral is based on an observable market price or current appraised value, the Company classifies the impaired loans as a non-recurring level 2 of the valuation hierarchy. When the Company measures impairment using anything but an observable market price or a current appraised value, the fair value measurement is out of the scope of SFAS 157 and is not included in the tables below.

Servicing Rights

Servicing rights are carried at the lower of cost or fair value. Servicing rights are subject to quarterly impairment testing. When the fair value of the servicing rights is lower than the book value, an impairment is accounted for by reducing the right to the current fair value. The Company uses independent third parties to value the servicing rights. The valuation model used takes into consideration discounted cash flows using current interest rates, and prepayment speeds based on current market observations for each type of the underlying asset being serviced. The Company classifies these servicing rights as non-recurring level 3 in the valuation hierarchy. For the three months ended

September 30, 2008, no impairment was recorded for the servicing rights held by the Company. For the nine months ended September 30, 2008, the Company reduced the carrying value of the servicing rights by $864,000 due to amortization and changes in the fair value.

Goodwill

Goodwill is tested for impairment during the third quarter of each year or if management determines there is a triggering event which may indicate a need to review goodwill for impairment. In order to determine the fair value of each reporting unit in the third quarter of 2008, the Company reviewed the capitalized earnings of each reporting unit, the outlook of the current economic environment and took into consideration the transaction multiples of publicly traded financial institutions adjusted for a change in control. When the fair value of a reporting unit is less than its carrying value, the Company is required to utilize a Step 2 valuation approach in accordance with SFAS 142. All of the Company’s reporting units passed Step 1 of the annual SFAS 142 impairment analysis in the third quarter of 2008 except the Commercial Banking segment. The Step 2 goodwill impairment analysis of the Commercial Banking segment required the Step 1 fair value of the reporting unit to be allocated to all of the fair values of the underlying tangible and intangible assets and liabilities for purposes of calculating the fair value of goodwill. This allocation resulted in a $22.1 million goodwill impairment recorded in the third quarter of 2008. The goodwill impairment testing was performed by an independent third party. The goodwill impairment calculation is an estimate subject to ongoing review as certain circumstances may cause additional impairment to be assessed in the future. As such, the Company used primarily level 3 inputs in its fair value of Goodwill.

Other Intangible Assets

The Company recorded intangible assets for identified core deposit intangibles, customer relationship intangibles and other intangibles that were acquired with the acquisitions of Pacific Crest Capital, Inc. (“PCCI”), FBSLO, MCM and REWA. The value and estimated run-off of the intangibles are determined at the time of purchase based on a valuation prepared by a third party. Monthly, amortization of intangibles are accounted for based on a forecasted run-off of the customer deposit and relationship intangible using a discounted cash flow approach which is prepared at the time the intangibles are identified at the date of purchase. These assets are analyzed quarterly to compare the amortization to the actual deposit and customer relationship run-off. If the actual run-off is more than the scheduled amortization a write-down of the intangible asset is accounted for. As such, the Company records these assets at fair value and the adjustments are classified as non-recurring level 3 in the valuation hierarchy.

Fair Value Interest Rate Swaps

GAAP requires that all derivatives be recorded at their current fair value on the balance sheet. The Company has entered into fair value interest rate swap agreements with customers. To avoid increasing the Company’s own interest rate risk by entering into these swap agreements, the Company has entered into offsetting fair value swap agreements with several financial institution counterparties. The fair market value of these swaps use observable market prices which are then adjusted based on future cash flows. As such, the fair value adjustments represent recurring level 2 adjustments. These fair value interest rate swaps are perfectly matched and the fair values of the swaps are recorded as other assets and other liabilities with the same amount in the Company’s balance sheet. Changes in the fair value of these swaps are not recorded in the Company’s income statement with exception of one swap agreement with a customer. During the second quarter of 2008, a customer defaulted on his monthly swap payments to the Bank and caused this swap agreement to become impaired. This off-balance sheet commitment is fully reserved for in the Company’s reserve for off-balance sheet commitments based on the fair value of this swap agreement as of September 30, 2008.

Assets and liabilities measured at fair value on a recurring basis at September 30, 2008 are summarized in the following table:


			*Recurring Fair Value* *Measurements at Reporting*
	As of September 30, 2008		Quoted prices in active markets for identical assets (Level 1)		Active markets *for* similar assets (Level 2)		Unobservable inputs *(Level 3)*
	(in thousands)
Assets:
Trading Securities:
Mortgage-backed securities	$	202,557	$	—	$	202,557	$	—

Total		202,557		—		202,557		—

Available-for-Sale:
U.S. Treasury obligations		26,673		—		26,673		—
U.S. Agency obligations		435,162		—		435,162		—
Collateralized mortgage obligations		20,186		—		20,186		—
Mortgage-backed securities		215,846		—		215,846		—
Asset-backed securities		1,568		—		1,568		—
State and municipal securities		290,648		—		290,648		—

Total		990,083		—		990,083		—

Fair value swap asset		6,890		—		6,890		—

Total assets at fair value	$	1,199,530	$	—	$	1,199,530	$	—

Liabilities:
Fair value swap liability	$	6,890	$	—	$	6,890	$	—

Total liabilities at fair value	$	6,890	$	—	$	6,890	$	—

The Company may be required to measure certain assets and liabilities at fair value on a non-recurring basis in accordance with GAAP. These include assets and liabilities that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.

Assets and liabilities measured at fair value on a non-recurring basis at September 30, 2008 are summarized in the table below:


			Non-recurring Fair Value Measurements at Reporting
	As of September 30, 2008		Quoted prices in active markets for identical assets (Level 1)		Active markets for similar assets (Level 2)		Unobservable inputs *(Level 3)*
	(in thousands)
Assets:
Impaired off balance sheet commitments	$	709	$	—	$	709	$	—
Impaired Loans		—		—		—		—
Servicing Rights		4,068		—		—		4,068
Intangible assets		6,954		—		—		6,954

Total assets at fair value	$	11,731	$	—	$	709	$	11,022

There were no liabilities measured at fair value on a non-recurring basis at September 30, 2008. In addition, there were no transfers in or out of the Company’s level 3 financial assets and liabilities for the nine months ended September 30, 2008.

14. SEGMENTS

The Company has four operating lines of business for segment reporting purposes including Community Banking, Commercial Banking, RAL and RT Programs and Wealth Management. The reported financial results for each respective business are based on Management assumptions, which allocate balance sheet and income statement items to each segment based on the type of customer and the types of products and services offered. If the Management structure and/or allocation process changes, allocations, transfers and assignments may change. A detailed description of each segment and, the products, services and customers from which revenues are derived for each segment are disclosed within the Company’s 2007 10-K Consolidated Financial Statements, Note 24, “Segments”.

During the third quarter of 2008, the Company reviewed goodwill for impairment in accordance with SFAS 142, Goodwill and Other Intangible Assets (“SFAS 142”). Due to the re-organization of the Company’s segments in December 2007 as disclosed in Note 24, Segments of the 2007 10-K, the Company was required to re-allocate goodwill based on the fair value of each segment at December 31, 2007. Prior to determining the fair value of each segment, the Company was required to determine the carrying value of each segment. In order to determine the carrying value of each segment, a majority of the assets and liabilities held by the Other segment were re-allocated to the Community Banking, Commercial Banking, RAL and RT Programs and Wealth Management segments. The income statement impact from the re-allocation is disclosed in the net credit (charge) for funds line item of the segment reporting tables.

Segment Disclosure

The following tables present information for each specific operating segment regarding assets, profit or loss, and specific items of revenue and expense that is included in that measure of segment profit or loss as reviewed by the Chief Executive Officer. Included in the table is an “All Other” segment which includes the administrative support units, the Holding Company and balancing of the funding uses and sources activity that is not allocated to the four operating segments.


	*Three-Months Ended September 30, 2008*
	*Operating Segments*
	Community Banking			Commercial Banking			RAL and RT Programs			Wealth Management			All Other			*Total*
	(in thousands)
Interest income	$	30,492		$	55,194		$	—		$	2,413		$	14,634		$	102,733
Interest expense		9,595			—			711			5,864			25,741			41,911

Net interest income		20,897			55,194			(711	)		(3,451	)		(11,107	)		60,822

Provision for loan losses		25,508			39,686			(3,697	)		2,465			—			63,962
Non-interest income		5,852			2,036			421			7,616			815			16,740
Non-interest expense		10,847			26,217			5,953			7,106			32,048			82,171

Direct income before tax		(9,606	)		(8,673	)		(2,546	)		(5,406	)		(42,340	)		(68,571	)

Indirect credit (charge) for funds		10,172			(25,951	)		2,794			4,848			8,137			—

Net income (loss) before tax	$	566		$	(34,624	)	$	248		$	(558	)	$	(34,203	)	$	(68,571	)

Total assets	$	3,056,847		$	3,889,166		$	239,890		$	214,778		$	287,967		$	7,688,648

	*Three-Months Ended September 30, 2007*
	*Operating Segments*
	Community Banking			Commercial Banking			RAL and RT Programs			Wealth Management			All Other			*Total*
	(in thousands)
Interest income	$	36,155		$	62,229		$	112		$	2,850		$	13,313		$	114,659
Interest expense		16,353			—			693			10,884			26,761			54,691

Net interest income		19,802			62,229			(581	)		(8,034	)		(13,448	)		59,968

Provision for loan losses		1,908			(564	)		22,383			674			—			24,401
Non-interest income		6,216			1,552			560			7,310			1,632			17,270
Non-interest expense		10,097			3,546			2,773			5,391			30,368			52,175

Direct income before tax		14,013			60,799			(25,177	)		(6,789	)		(42,184	)		662

Indirect credit (charge) for funds		10,182			(23,437	)		2,055			6,184			5,016			—

Net income (loss) before tax	$	24,195		$	37,362		$	(23,122	)	$	(605	)	$	(37,168	)	$	662

Total assets	$	3,161,696		$	3,545,467		$	178,205		$	195,432		$	206,276		$	7,287,076


	*Nine-Months Ended September 30, 2008*
	*Operating Segments*
	Community Banking			Commercial Banking			RAL and RT Programs		Wealth Management			*All* *Other*			*Total*
	(in thousands)
Interest income	$	90,417		$	164,942		$	110,465	$	7,227		$	44,075		$	417,126
Interest expense		32,538			—			7,046		20,259			70,909			130,752

Net interest income		57,879			164,942			103,419		(13,032	)		(26,834	)		286,374

Provision for loan losses		50,339			72,719			22,717		3,748			—			149,523
Non-interest income		17,002			5,062			116,236		23,506			2,451			164,257
Non-interest expense		31,175			35,454			81,544		20,411			100,124			268,708

Direct income before tax		(6,633	)		61,831			115,394		(13,685	)		(124,507	)		32,400

Indirect credit (charge) for funds		33,739			(80,120	)		8,000		17,478			20,903			—

Net income (loss) before tax	$	27,106		$	(18,289	)	$	123,394	$	3,793		$	(103,604	)	$	32,400

Total assets	$	3,056,847		$	3,889,166		$	239,890	$	214,778		$	287,967		$	7,688,648

	*Nine-Months Ended September 30, 2007*
	*Operating Segments*
	Community Banking			Commercial Banking			RAL and RT Programs		Wealth Management			*All* *Other*			*Total*
	(in thousands)
Interest income	$	126,691		$	178,329		$	118,568	$	9,077		$	39,109		$	471,774
Interest expense		47,640			2			11,804		31,089			79,026			169,561

Net interest income		79,051			178,327			106,764		(22,012	)		(39,917	)		302,213

Provision for loan losses		11,262			2,380			93,960		892			—			108,494
Non-interest income		42,181			4,602			94,062		22,214			7,312			170,371
Non-interest expense		34,946			11,921			67,002		16,869			93,394			224,132

Direct income before tax		75,024			168,628			39,864		(17,559	)		(125,999	)		139,958

Indirect credit (charge) for funds		30,545			(70,310	)		6,165		18,551			15,049			—

Net income (loss) before tax	$	105,569		$	98,318		$	46,029	$	992		$	(110,950	)	$	139,958

Total assets	$	3,161,696		$	3,545,467		$	178,205	$	195,432		$	206,276		$	7,287,076

As referenced in Note 1, “Summary of Significant Accounting Policies,” certain amounts in the table above have been reclassified from 2007 to 2008 for comparability. The changes made to the reportable segments in the fourth quarter of 2007 are disclosed on page 130 of the 2007 Form 10-K.

15. INCOME TAXES

The effective tax rate for the three month period ended September 30, 2008 was 30.73%. The 41.08% effective tax rate for the first nine months of 2008 was calculated based on the actual results for the first nine months of 2008 and not on a projected annual effective tax rate. The annual effective tax rate cannot be predicted due to the potential variability in future financial results. The unusual tax rate for 2008 is primarily due to a $22.1 million goodwill impairment charge that is non-deductible for income tax purposes.

16. SUBSEQUENT EVENTS

In September 2008, the Company issued additional shares in conjunction with the “Dividend Reinvestment and Direct Stock Purchase Plan” which authorized 3,500,000 additional shares for raising additional capital. During October 2008, 407,000 shares were issued and $7.2 million of proceeds were received.

On October 24, 2008, the Company sold two retail banking branches from the Community Banking segment which are located in Santa Paula, California. The Company sold $54.4 million of deposits and received a premium of $3.5 million. This sale was settled with $30.4 million of loans and, $20.1 million of cash. The final determination of the gain on sale of these locations will be disclosed in the Company’s 2008 10-K filing.

On November 5, 2008, the Company received preliminary approval to participate in the U.S. Treasury’s Troubled Asset Relief Capital Purchase Program (“CPP”) with approval of 3% of the Bank’s risk weighted assets. At September 30, 2008, the Bank had $6.3 billion of risk weighted assets which, is approximately $189.1 million of additional capital that the TARP program has preliminarily approved. Under the terms of such approval, the Company may issue to the U.S. Treasury up to approximately $189.1 million, of 3.0% of the Bank’s risk weighted assets at September 30, 2008, of senior preferred shares. The senior preferred shares would pay a cumulative dividend of 5.0% in the first five years and 9.0% thereafter. The Company will also issue to the U.S. Treasury warrants to purchase common stock with an aggregate market price equal to 15.0% of the senior preferred shares which are issued to the U.S. Treasury. With this additional capital, the Company’s capital ratios at September 30, 2008 would have been 12.1% for the Tier 1 capital ratio and 14.9% for the total capital to risk weighted assets. The Company has 30 days to complete the documentation required to finalize the TARP approval process. TARP gave the U.S. Treasury authority to deploy up to $700 billion into the financial system with an objective of improving liquidity in capital markets. On October 24, 2008, U.S. Treasury announced plans to direct $250 billion of this authority into preferred stock investments in banks. For additional information regarding the Company participating in the U.S. Treasury department’s TARP go to page 54 of the MD&A Capital Resources section and refer to page 57, Item 3, Quantitative and Qualitative Disclosures About Market Risk of this Form 10-Q.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion is designed to provide insight into Management’s assessment of significant trends related to the Company’s consolidated financial condition, results of operations, liquidity, capital resources, and interest rate sensitivity. It should be read in conjunction with the 2007 10-K and unaudited interim consolidated financial statements and notes hereto and the other financial information appearing elsewhere in this report.

BUSINESS

PCB is a bank holding company. All references to the Company or PCB apply to PCB and its subsidiaries on a consolidated basis. The Company’s organizational structure and description of services are discussed in Item 1, “Business” and in Note 1, “Summary of Significant Accounting Policies” of the 2007 10-K and should be read in conjunction with this 10-Q. Terms and acronyms used throughout this document are defined in the glossary on pages 62 through 63. Throughout the MD&A of this 10-Q, there is discussion of the Company’s financial information with and without the RAL and RT programs. When the discussion refers to the “Core Bank”, this means all of the financial activity of the consolidated financial statements excluding the RAL and RT programs.

On January 4, 2008, PCBNA acquired the assets of REWA, a San Luis Obispo, California-based registered investment advisor which provides financial investment advisory services to individuals, families and fiduciaries. On the date of purchase, REWA managed assets of $464.1 million and PCBNA initially paid $7.0 million for the assets of the firm. In exchange, PCBNA acquired substantially all of the assets and liabilities of REWA (with an additional contingent payment due five years after the purchase date) and formed a new wholly-owned subsidiary of PCBNA by the same name. The Company is reporting all of the activity from the purchase of REWA in the Wealth Management segment. In connection with the acquisition of REWA, the Company has recorded $4.2 million of goodwill and $2.8 million of intangible assets. The goodwill associated with the purchase of REWA will be reviewed annually for impairment and the intangible assets will be amortized over their expected life and reviewed quarterly for impairment. The clients of REWA will continue to be served by the same principal and support staff.

Segments

The Company’s businesses as viewed by Management are organized by product line and result in four operating segments. The operating segments are: Community Banking, Commercial Banking, RAL and RT Programs and Wealth Management. The administrative functions and the Holding Company operations of the Company are not considered part of operating activities of the Company and for financial reporting purposes the activity is reported in the “All Other” segment. A description of the segments, financial results and allocation methodology is discussed in the Company’s Consolidated Financial Statements within the 2007 10-K, Note 24, “Segments” and the current financial results for each segment are presented in this 10-Q, Note 14, “Segments” in the Consolidated Financial Statements. The significant changes within the financial statements that relate to each segment are incorporated in the MD&A below.

RECENT DEVELOPMENTS

There have been significant disruptions in the U.S. and international financial system during the period covered by this report. As a result, available credit has been reduced or ceased to exist. The availability of credit, confidence in the entire financial sector, and volatility in financial markets has been adversely affected. The U.S. government, the governments of other countries, and multinational institutions have provided vast amounts of liquidity and capital into the banking system. Additional discussion regarding the volatility in the financial markets and the risks associated with the current economic environment is discussed in more detail throughout the MD&A and in more detail on page 57 within Item 3, Quantitative and Qualitative Disclosures About Market Risk of this Form 10-Q.

On October 3, 2008, the Troubled Asset Relief Program (“TARP”) was signed into law. TARP gave the U.S. Treasury authority to deploy up to $700 billion into the financial system with an objective of improving liquidity in capital markets. On October 24, 2008, Treasury announced plans to direct $250 billion of this authority into preferred stock investments in banks. On October 22, 2008, the Company submitted an application to the TARP Capital Purchase Program for 3% of the Bank’s risk weighted assets and, on November 5, 2008, the Company obtained preliminary approval to participate in the U.S. Treasury’s TARP. This approval is pending based on additional documentation required to complete the approval process which is due to be completed within 30 days after the approval date. Under the terms of such approval, the Company may issue to the U.S. Treasury up to approximately $189.1 million, of 3.0% of the Bank’s risk weighted assets at September 30, 2008, of senior preferred shares. The senior preferred shares would pay a cumulative dividend of 5.0% in the first five years and 9.0% thereafter. The Company will also issue to the U.S. Treasury warrants to purchase common stock with an aggregate market price equal to 15.0% of the senior preferred shares which are issued to the U.S. Treasury. Additional discussion surrounding the anticipated approval of additional capital from the TARP is discussed in the Capital Resources section starting on page 54 of this Form 10-Q.

SIGNIFICANT ACCOUNTING POLICIES

The Company’s significant accounting policies are disclosed in the 2007 10-K, Note 1, “Summary of Significant Accounting Policies” on pages 76 – 88 and in the “Critical Accounting Polices” section of the MD&A on pages 54 – 57 of the 2007 10-K. Management believes that a number of the significant accounting policies are essential to the understanding of the Company’s financial condition and results of operation because they involve estimates, judgment, or are otherwise less subject to precise measurement and because the quality of the estimates materially impact those results. A number of significant accounting policies are used in the preparation of the Company’s consolidated financial statements. These include: allowance for loan losses, accounting for income taxes, goodwill and other intangible assets and revenue recognition for the RAL and RT Programs. These significant accounting policies are discussed in detail in the Company’s 2007 10-K, including a description of how the estimates are determined and an indication of the consequences of an over or under estimate. Although Management believes these estimates and assumptions to be reasonably accurate, actual results may differ.

OVERVIEW AND HIGHLIGHTS

Net loss for the third quarter of 2008 was $47.5 million or ($1.03) per diluted share, compared with net income of $3.9 million, or $0.08 per diluted share, reported for the third quarter of 2007. Net income for the nine month period ended September 30, 2008 was $19.1 million or $0.41 per diluted share, compared with net income of $88.7 million or $1.88 per diluted share.

The significant factors impacting net income for the three and nine month periods ending September 30, 2008 compared to the same periods in 2007 were:

•

increased provision for loan losses of $39.6 million for the third quarter of 2008 which reflects a provision for loan losses for the Core Bank of $67.7 million for the quarter and $126.8 million for the nine month period,

•

a goodwill impairment charge of $22.1 million for the third quarter of 2008,

•

a decrease in tax provision of $17.9 million for third quarter, $38.0 million year to date,

•

a decrease in net interest income of $15.8 million for the year to date period, primarily as the result of loan sales and transfers during 2007,

•

an increase in volume from the RT program, which increased RT fees by $22.8 million for the comparable year to date periods.

The impact to the Company from these items will be discussed in more detail throughout the analysis sections of this report as they pertain to the Company’s overall comparative performance for the periods ended September 30, 2008 compared to the periods ended September 30, 2007.

RESULTS OF OPERATIONS

INTEREST INCOME

The following table presents a summary of interest income for the three month periods ended September 30, 2008 and 2007:


	*Three-Months Ended* *September 30,*
					*Change*
	*2008*		*2007*		$		%
	(in thousands)
Interest income:
Loans	$	88,109	$	101,404	$	(13,295)	(13.1%)
Investment securities, trading		2,484		—		2,484	N/A
Investment securities, available-for-sale		12,021		11,736		285	2.4%
Other		119		1,519		(1,400)	(92.2%)

Total	$	102,733	$	114,659	$	(11,926)	(10.4%)

Interest income for the third quarter of 2008 decreased by $11.9 million, or 10.4% compared to the third quarter of 2007 primarily due to a decline in interest income from loans of $13.3 million, or 13.1%. The decrease in loan interest income was partially offset by increased interest income from investments of $2.8 million for the comparable quarters. Interest income on loans declined primarily due to loan sales in 2007 and interest rate declines resulting from the Federal Reserve lowering short-term interest rates. Interest income from commercial, consumer, residential real estate, commercial real estate and RAL loans declined by $5.5 million, $2.6 million, $2.6 million, $2.5 million and $115,000 respectively for the comparable periods. The majority of the decrease is attributable to declines in interest rates. The decline in interest income from the residential real estate portfolio was also impacted by loan sales.

The following table presents a summary of interest income for the nine month periods ended September 30, 2008 and 2007:


	*Nine-Months Ended* *September 30,*
					*Change*
	*2008*		*2007*		$		%
	(in thousands)
Interest income:
Loans	$	371,358	$	432,869	$	(61,511)	(14.2%)
Investment securities, trading		4,121		—		4,121	N/A
Investment securities, available-for-sale		39,366		36,276		3,090	8.5%
Other		2,281		2,629		(348)	(13.2%)

Total	$	417,126	$	471,774	$	(54,648)	(11.6%)

Interest income for the nine month period ending September 30, 2008 decreased by $54.6 million, or 11.6% compared to the nine month period ending September 30, 2007 primarily due to a decline in interest income from loans of $61.5 million partially offset by increased interest income from investment securities of $7.2 million. The decline in loan interest income was mostly due to decreased interest income from commercial, leasing, consumer and RALs of $49.8 million, or 20.2%. Interest income from loans declined for the comparable quarters primarily due to loan sales in 2007, interest rate declines primarily the result of the Federal Reserve rate cuts and a decline in RAL interest income. Commercial loan interest income decreased $24.0 million mostly due to the leasing loan portfolio sale in June 2007 which contributed $12.6 million of this decrease and a reduction of interest rates for adjustable rate loans attributable to the Federal Reserve decreasing short-term interest rates. Interest income from consumer loans declined $15.9 million primarily due to the $4.2 million decrease in interest income from indirect auto loans sold in May 2007 and a $3.9 million decline in interest income from the discontinued Holiday loan product in 2007. RAL interest income declined by $9.9 million for the nine months ended September 30, 2008 compared to 2007 mostly due to a combination of changes in channel volumes

and average fees collected on RALs. The remaining decline in loan interest income was the result of declines in commercial real estate and residential real estate loan interest due to a combination of interest rate changes and two residential real estate loan transactions which converted $353.4 million of loans to securities in the fourth quarter of 2007 and first quarter of 2008.

The increase in other interest income from investments is primarily due to increased interest from MBS in the trading portfolio, U.S. agencies securities and state and municipal securities of $4.1 million, $2.9 million and $1.2 million, respectively for the comparable periods.

INTEREST EXPENSE

The following table represents the three month comparable periods of interest expense:


	*Three-Months Ended* *September 30,*
					*Change*
	*2008*		*2007*		$			%
	(in thousands)
Interest expense:
Deposits	$	18,565	$	32,399	$	(13,834	)	(42.7%)
Securities sold under agreements to repurchase		3,020		2,727		293		10.7%
Federal funds purchased		424		723		(299	)	(41.4%)
Long-term debt and other borrowings		19,902		18,842		1,060		5.6%

Total	$	41,911	$	54,691	$	(12,780	)	(23.4%)

Interest expense for the third quarter of 2008 decreased by $12.8 million or 23.4%, to $41.9 million compared to $54.7 million for the third quarter of 2007. This decrease in interest expense is primarily due to decreased interest rates paid on deposits. Interest rates paid on deposits decreased by 145 basis points when comparing the quarters ending September 30, 2008 to 2007. Interest rates on deposits and short-term borrowings significantly decreased for the comparable periods due to the Federal Open Market Committee of the Federal Reserve System (“FOMC”)’s federal funds interest rate decreasing from 5.25% during a majority of 2007 to 2.00% on April 30, 2008. The FOMC has subsequently dropped the federal funds interest rate by 100 basis points since September 30, 2008.

The following table represents the nine month comparable periods of interest expense:


	*Nine-Months Ended* *September 30,*
					*Change*
	*2008*		*2007*		$			%
	(in thousands)
Interest expense:
Deposits	$	65,377	$	99,236	$	(33,859	)	(34.1%)
Securities sold under agreements to repurchase		8,446		7,828		618		7.9%
Federal funds purchased		1,413		6,737		(5,324	)	(79.0%)
Long-term debt and other borrowings		55,516		55,760		(244	)	(0.4%)

Total	$	130,752	$	169,561	$	(38,809	)	(22.9%)

Interest expense for the nine month period ending September 30, 2008 decreased $38.8 million, or 22.9% to $130.8 million for the comparable period mostly resulting from the FOMC decreasing the federal funds rate by 275 basis points over the last 12 months. Interest rates paid on deposits decreased by 115 basis points and was the driver of the decrease of $33.9 million, or 34.1% in deposit interest expense. As CDs with higher interest rates matured, they were replaced with new CDs at lower interest rates. Rates paid on other transaction accounts also declined in conjunction with the FOMC rate reductions. The FOMC rate changes also directly impacted federal funds purchased which decreased interest expense by $5.3 million, or 79% for the comparable periods.

NET INTEREST MARGIN

The net interest margin is reported on a FTE basis. A tax equivalent adjustment is added to reflect that interest earned on certain municipal securities and loans which are exempt from Federal income tax.

The following tables present FTE net interest margin for the comparable three month periods:


	*Three-Months Ended September 30,*
	*2008*						*2007*
	*Balance*		*Income*		*Rate*		*Balance*		*Income*		*Rate*
	(dollars in thousands)
Assets:
Commercial paper	$	6,408	$	37	2.30	%	$	—	$	—	n/a
Federal funds sold		19,287		82	1.69	%		115,006		1,519	5.24	%
Securities: (1) (2)
Taxable		917,702		11,077	4.80	%		754,002		8,940	4.70	%
Non-taxable		265,132		4,807	7.25	%		206,790		3,498	6.77	%

Total securities		1,182,834		15,884	5.35	%		960,792		12,438	5.15	%

Loans: (1) (3)
Commercial		1,207,890		18,914	6.23	%		1,088,061		24,320	8.87	%
Real estate-multi family & commercial		2,752,603		41,886	6.09	%		2,438,997		44,062	7.23	%
Real estate-residential 1-4 family		1,203,771		17,889	5.94	%		1,379,669		20,469	5.93	%
Consumer		613,796		9,831	6.37	%		613,026		12,528	8.11	%
Other		2,251		30	5.30	%		2,911		62	8.45	%

Total loans, net		5,780,311		88,550	6.12	%		5,522,664		101,441	7.33	%

Total interest-earning assets		6,988,840		104,553	5.95	%		6,598,462		115,398	6.94	%

Market Value Adjustment		18,580						11,728
Noninterest-earning assets		593,612						639,824

Total assets	$	7,601,032					$	7,250,014

Liabilities and shareholders’ equity:
Interest-bearing deposits:
Savings and interest-bearing transaction accounts	$	1,891,370		4,660	0.98	%	$	2,202,366		15,095	2.72	%
Time certificates of deposit		1,849,236		13,905	2.99	%		1,560,697		17,304	4.40	%

Total interest-bearing deposits		3,740,606		18,565	1.97	%		3,763,063		32,399	3.42	%

Borrowed funds:
Repos and Federal funds purchased		436,123		3,444	3.14	%		279,404		3,450	4.90	%
Other borrowings		1,656,597		19,902	4.78	%		1,409,366		18,842	5.30	%

Total borrowed funds		2,092,720		23,346	4.44	%		1,688,770		22,292	5.24	%

Total interest-bearing liabilities		5,833,326		41,911	2.86	%		5,451,833		54,691	3.98	%

Noninterest-bearing demand deposits		987,336						1,020,983
Other liabilities		80,479						106,588
Shareholders’ equity		699,891						670,610

Total liabilities and shareholders’ equity	$	7,601,032					$	7,250,014

Tax equivalent net interest income/margin				62,642	3.57	%				60,707	3.65	%

Less: non-taxable interest from securities and loans				1,820	0.10	%				739	0.04	%

Net interest income			$	60,822	3.47	%			$	59,968	3.61	%

(1)	Income and yield calculations are presented on a fully taxable equivalent basis.

(2)	Average securities balances are based on amortized historical cost, excluding SFAS 115 adjustments to fair value, which are included in other assets.

(3)	Nonaccrual loans are included in loan balances. Interest income includes related fee income.

Volume and Rate Variance Analysis of Net Interest Income – Tax Equivalent Basis:


	Three-Months Ended September 30, 2008 versus September 30, 2007
	*Changes due to*
	*Rate*			*Volume*			*Total Change*
	(in thousands)
Commercial paper	$	—		$	37		$	37
Federal funds sold		(645	)		(792	)		(1,437	)
Investment securities		454			2,992			3,446
Loans, net		(18,021	)		5,130			(12,891	)

Total interest-earning assets	$	(18,212	)	$	7,367		$	(10,845	)

Savings and interest-bearing demand transaction accounts		(8,548	)		(1,887	)		(10,435	)
Time certificates of deposit		(6,203	)		2,804			(3,399	)

		(14,751	)		917			(13,834	)

Repos and Federal funds purchased		(1,509	)		1,503			(6	)
Other borrowings		(1,983	)		3,043			1,060

		(3,492	)		4,546			1,054

Total interest-bearing liabilities		(18,243	)		5,463			(12,780	)

Tax equivalent net interest income	$	31		$	1,904		$	1,935

Note:

Income and yield calculations are presented on a fully taxable equivalent basis.

The change not solely due to volume or rate has been prorated into rate and volume components.

Net Interest Margin

The FTE net interest margin for the three months ended September 30, 2008 decreased to 3.57% compared to 3.65% for the same period of 2007. This net interest margin decrease is the result of declining interest rates received on average earning assets which decreased by 99 basis points, partially offset by declining interest rates paid on average earning liabilities which decreased by 112 basis points for the comparable three month periods. Interest income on loans decreased by $12.9 million, or 121 basis points for the three month comparable periods ended September 30, 2008 and 2007. Of the $12.9 million decrease, $18.0 million is attributable to decreases in interest rates received on loans. Commercial and real estate loans secured by multi-family and commercial properties were the primary drivers of the decreased rates received on loans. Interest expense on deposits decreased by $13.8 million or 145 basis points for the comparable three month periods ended September 30, 2008 compared to 2007. Of the $13.8 million decrease, $14.8 million is attributable to decreased interest rates paid on deposits partially offset by a $917,000 increase due to deposit growth. These decreases were primarily caused by the FOMC reducing short-term interest rates.

The following tables present FTE net interest margin for the comparable nine month periods:


	*Nine-Months Ended September 30,*
	*2008*						*2007*
	*Balance*		*Income*		*Rate*		*Balance*		*Income*		*Rate*
	(dollars in thousands)
Assets:
Commercial paper	$	25,947	$	560	2.88	%	$	—	$	—	n/a
Federal funds sold and other earning assets		85,179		1,721	2.70	%		66,421		2,629	5.29	%
Securities:
Taxable		927,040		33,935	4.89	%		806,695		27,901	4.62	%
Non-taxable		244,567		13,418	7.32	%		207,427		11,708	7.53	%

Total securities		1,171,607		47,353	5.40	%		1,014,122		39,609	5.22	%

Loans:
Commercial		1,198,260		58,181	6.49	%		1,232,286		82,096	8.91	%
Real estate-multi family & commercial		2,646,493		123,306	6.21	%		2,340,394		128,515	7.32	%
Real estate-residential 1-4 family		1,140,836		51,124	5.98	%		1,304,797		57,327	5.86	%
Consumer		738,478		139,156	25.17	%		1,142,874		164,961	19.30	%
Other		3,338		149	5.96	%		2,890		172	7.96	%

Total loans (1)		5,727,405		371,916	8.67	%		6,023,241		433,071	9.60	%

Total earning assets		7,010,138		421,550	8.03	%		7,103,784		475,309	8.95	%

SFAS 115 Market Value Adjustment		25,957						18,821
Non-earning assets		589,773						444,565

Total assets	$	7,625,868					$	7,567,170

Liabilities and shareholders’ equity:
Interest-bearing deposits:
Savings and interest-bearing transaction accounts	$	2,005,641		19,085	1.27	%	$	2,132,474		41,032	2.57	%
Time certificates of deposit		1,818,462		46,292	3.40	%		1,732,963		58,204	4.49	%

Total interest-bearing deposits		3,824,103		65,377	2.28	%		3,865,437		99,236	3.43	%

Borrowed funds:
Repos and Federal funds purchased		406,597		9,859	3.24	%		382,088		14,565	5.10	%
Other borrowings		1,504,382		55,516	4.93	%		1,401,141		55,760	5.32	%

Total borrowed funds		1,910,979		65,375	4.57	%		1,783,229		70,325	5.27	%

Total interest-bearing liabilities		5,735,082		130,752	3.05	%		5,648,666		169,561	4.01	%

Non-interest-bearing demand deposits		1,126,123						1,160,572
Other liabilities		55,219						100,680
Shareholders’ equity		709,444						657,252

Total liabilities and shareholders’ equity	$	7,625,868					$	7,567,170

Tax equivalent net interest income/margin				290,798	5.54	%				305,748	5.75	%
Less: tax equivalent income included in interest income from non-taxable securities and loans				4,424	0.08	%				3,535	0.06	%

Net interest income			$	286,374	5.46	%			$	302,213	5.69	%

Loan information Core Bank:
Consumer loans, Core Bank	$	603,266	$	30,394	6.73	%	$	704,863	$	46,393	8.80	%
Loans, Core Bank	$	5,592,193	$	263,154	6.29	%	$	5,585,230	$	314,503	7.53	%

(1)	Income and yield calculations are presented on a fully taxable equivalent basis.

(2)	Average securities balances are based on amortized historical cost, excluding SFAS 115 adjustments to fair value, which are included in other assets.

(3)	Nonaccrual loans are included in loan balances. Interest income includes related fee income.

Volume and Rate Variance Analysis of Net Interest Income – Tax Equivalent Basis:


	*Nine-Months Ended*
	*September 30, 2008 versus September 30, 2007*
	*Changes due to*
	*Rate*			*Volume*			*Total Change*
	(in thousands)
Commercial paper	$	—		$	560		$	560
Federal funds sold		(1,518	)		610			(908	)
Investment securities		1,365			6,379			7,744
Loans, net		672			(61,827	)		(61,155	)

Total interest-earning assets	$	519		$	(54,278	)	$	(53,759	)

Savings and interest-bearing demand transaction accounts		(19,638	)		(2,309	)		(21,947	)
Time certificates of deposit		(14,677	)		2,765			(11,912	)

		(34,315	)		456			(33,859	)

Repos and Federal funds purchased		(5,594	)		888			(4,706	)
Other borrowings		(4,223	)		3,979			(244	)

		(9,817	)		4,867			(4,950	)

Total interest-bearing liabilities		(44,132	)		5,323			(38,809	)

Tax equivalent net interest income	$	44,651		$	(59,601	)	$	(14,950	)


Loans excluding RALs	$	(51,743	)	$	394		$	(51,349	)
Consumer loans excluding RALs	$	(9,920	)	$	(6,079	)	$	(15,999	)


		Note:		Income and yield calculations are presented on a fully taxable equivalent basis.
				The change not solely due to volume or rate has been prorated into rate and volume components.

Net Interest Margin

The FTE net interest margin for the nine months ended September 30, 2008 decreased to 5.54% compared to 5.75% for the same period of 2007. This decrease is a result of declining interest rates received on earning assets in combination with a decline in total interest earning assets partially offset by decreased interest rates paid on deposits and borrowings. FTE interest income decreased by $53.8 million. This decrease is mostly attributable to the decrease in average earning assets. Average loans decreased by $295.8 million and caused $61.8 million of the decrease which was offset by an increase in the average balance of investment securities of $157.5 million and increased interest income by $6.4 million. Interest expense decreased by $38.8 million during the comparable nine month periods ended September 30, 2008 and 2007. The primary driver decreasing interest expense is the decline in interest rates which was caused by the FOMC decreasing short term interest rates over the last twelve months by 275 basis points. Interest rates paid on deposits decreased by 115 basis points while interest rates on borrowings decreased by 70 basis points, these decreases accounted for $44.1 million of the $38.8 million decrease which were offset by an increase in average interest bearing liabilities of $86.4 million.

The first and second quarters’ net interest margin of each year are significantly impacted by the RAL activity that peaks during the first quarter of each year. RALs generally have a very short duration (2-3 weeks), which cause the interest rates received on consumer loans to be significantly higher than what is anticipated for the entire year. The table below summarizes the net interest margin excluding RALs.


	Nine-Months Ended September 30,
	*2008*		*2007*
	(dollars in thousands)
Consolidated average earning assets	$	7,010,138	$	7,103,784
Less: RAL average earning assets		135,212		438,011

Core bank average earning assets		6,874,926		6,665,773

Consolidated tax equivalent net interest income		290,798		305,748
Less: RAL net interest income		103,419		106,764

Core bank tax equivalent, non-GAAP net interest income	$	187,379	$	198,984

Core bank net interest margin		3.64%		3.99%

The net interest margin for the Core Bank decreased to 3.64% for the nine months ended September 30, 2008 compared to 3.99% for the same period of 2007. Due to the seasonality of the RAL product, Management has disclosed the Core Bank net interest margin, which excludes RALs. The Core Bank’s FTE net interest income was $187.4 million, a decrease of $11.6 million when comparing to the same in 2007. The main driver of this decrease is a decline in core loan interest rates from 7.53% at September 30, 2007 to 6.29% at September 30, 2008 offset by a decrease in loan volume, which is attributable to the sale and transfer of the leasing, indirect auto and residential real estate loan portfolios in 2007. Commercial and real estate secured multi-family and commercial loan portfolios caused a majority of the decrease. At the same time, interest rates paid on deposits, and borrowings also decreased, partially offsetting the decreased interest income from loans.

PROVISION FOR LOAN LOSSES

Quarterly, the Company determines the amount of allowance for loan losses adequate to provide for losses inherent in the Company’s loan portfolios. The provision for loan losses is determined by the net change in the allowance for loan losses. For a detailed discussion of the Company’s allowance for loan losses, refer to the “Significant Accounting Policies” discussion in Note 1, “Summary of Significant Accounting Policies” in the 2007 10-K and in the MD&A allowance for loan loss discussion of this Form 10-Q on page 52.

A summary of the provision for loan losses for the comparable three month periods ended are as follows:


	*Three-Months Ended* *September 30,*
						*Change*
	*2008*			*2007*		$			%
	(in thousands)
Provision for loan losses:
Core Bank	$	67,659		$	2,018	$	65,641		N/A
RAL		(3,697	)		22,383		(26,080	)	N/A

Total	$	63,962		$	24,401	$	39,561		162.1%

Provision for loan losses were $64.0 million for the three month period ended September 30, 2008 compared to $24.4 million for the three month period ended September 30, 2007, an increase of $39.6 million. The increased provision for loan losses was driven by the slowing economy causing the Core Bank’s loan portfolio to experience higher than anticipated historical loan losses partially offset by increased recoveries for RALs due to enhanced credit screening procedures put in place for the 2008 RAL season. Provision for loan losses for the Core Bank increased by $65.6 million for the third quarter 2008 compared to 2007. The Core Bank’s breakdown of provision for loan losses consisted of $23.7

million of construction and land, $16.9 million commercial real estate, $6.5 million commercial and industrial, $5.8 million residential real estate, $5.7 million home equity, and $9.1 million all other portfolios. The provision expense for the comparable period 2007 was $2.0 million primarily related to other consumer products. The RAL credit to provision of $3.7 million for the three months ended September 30, 2008 was due to increased collections.

A summary of the provision for loan losses for the comparable nine month periods ended are as follows:


	*Nine-Months Ended* *September 30,*
					*Change*
	*2008*		*2007*		$			%
	(in thousands)
Provision for loan losses:
Core Bank	$	126,806	$	14,534	$	112,272		772.5%
RAL		22,717		93,960		(71,243	)	(75.8%)

Total	$	149,523	$	108,494	$	41,029		37.8%

For the year-to-date periods ended September 30, 2008 and 2007, provision for loan losses were $149.5 million and $108.5 million, an increase of $41.0 million or 37.8%. This increase was caused by a significant increase in provision for loan losses for the Core Bank of $112.3 million, which was partially offset by a significant decrease in the RAL provision for loan losses of $71.2 million for the comparable periods. The Core Bank’s loan portfolio had $48.8 million of net charge-offs in 2008 and required additional provision for loan losses as a result of the downturn in the economy. At the same time, the RALs have experienced less charge-offs than in previous years due to the enhanced credit controls put into place by the Company for the 2008 RAL season, which has reduced the provision for loan losses for RALs. Provision for loan losses for RALs for the nine month periods ending September 30, 2008 and 2007 were $22.7 million and $94.0 million, a decrease of $71.2 million or 75.8%. The enhanced credit risk controls for RALs resulted in a decline of net charge-offs of $71.2 million for the nine month period ended September 30, 2008, compared to 2007.

NON-INTEREST INCOME

Non-interest income primarily consists of fee income received from servicing deposit relationships, trust and investment advisory fees, RT fees earned from processing tax refunds, fees and commissions earned on certain transactions, unrealized gains and losses on the trading portfolio, impairment of AFS MBS and realized gains and losses on sold and called securities and gains and losses on the sale or disposal of assets.

The table below summarizes the changes in non-interest income for the comparable quarters:


	Three-Months Ended September 30,
						*Change*
	*2008*			*2007*		$			%
	(in thousands)
Non-interest income:
Service charges and fees	$	8,028		$	8,551	$	(523	)	(6.1%)
Trust and investment advisory fees		6,352			6,009		343		5.7%
Refund transfer fees		385			370		15		4.1%
Loss on securities, net		(487	)		5		(492	)	N/A
Other		2,462			2,335		127		5.4%

Total	$	16,740		$	17,270	$	(530	)	(3.1%)

Total non-interest income was $16.7 million for the three months ended September 30, 2008 compared to $17.3 million for the same period in 2007, a decrease of 3.1%. This decrease is mostly attributed to a 6.1% decrease in service charges and fees and a net loss on securities transactions of $487,000 partially offset by 5.7% increase in cash management fees. The net loss on securities was mostly due to additional impairment of MBS AFS of $797,000, investment in U.S. Treasury

futures losses of $139,000 and net loss on securities sold of $64,000 partially offset by gains on the trading securities of $513,000. The MBS AFS impairment is from valuation adjustments due to changes in interest rates and Management’s decision to sell MBS securities which are in a loss position. The impairment charge was not due to the credit quality of the underlying loans of the MBS AFS portfolio.

The table below summarizes the changes in non-interest income for the comparable year to date periods:


	*Nine-Months Ended* *September 30,*
						*Change*
	*2008*			*2007*		$			%
	(in thousands)
Non-interest income:
Refund transfer fees	$	68,576		$	45,756	$	22,820		49.9%
Gain on sale of RALs, net		44,580			41,822		2,758		6.6%
Service charges and fees		27,220			31,659		(4,439	)	(14.0%)
Trust and investment advisory fees		19,637			18,183		1,454		8.0%
Gain on sale of leasing portfolio		—			24,344		(24,344	)	N/A
(Loss)/Gain on securities, net		(422	)		1,944		(2,366	)	(121.7%)
Other		4,666			6,663		(1,997	)	(30.0%)

Total	$	164,257		$	170,371	$	(6,114	)	(3.6%)

Total non-interest income was $164.3 million for the nine months ended September 30, 2008 compared to $170.4 million for the same period in 2007, a decrease of $6.1 million or 3.6%. Excluding the prior year gain on sale of the leasing portfolio in June 2007 of $24.3 million, the non-interest income for the nine month comparable periods increased by $18.2 million for 2008 compared to 2007. This increase was primarily due to increased RT fees of $22.8 million or 49.9% from $45.8 million for the nine month period ended September 30, 2007 to $68.6 million for the same period of 2008. The increase in RT fees occurred due to increased volume of RTs. The number of RT transactions increased by 1.5 million, or 30.8% when comparing the nine month period ended September 30, 2008 to September 30, 2007.

The decrease in non-interest income was also impacted by a decrease in service charges and fees of $4.4 million when comparing the nine month period ended September 30, 2008 to September 30, 2007. This decrease was primarily caused by lower collection fees on RALs which occurred due to contract changes and a decrease in the number of participants involved in the cross-collection program of $3.1 million and the discontinuation of a third party commission received on official check outsourcing of $901,000. RAL collection fees are earned from the collection of previous years’ charged-off RALs for participants of the cross-collection program. The outsourcing of the official checks was discontinued in July of 2008.

The net gain on sale of RALs was $44.6 million for the 2008 RAL securitization, an increase of $2.8 million or 6.6% compared to the 2007 RAL securitization. The increase in the gain is directly related to the increased volume of RALs sold into the securitization facility. For additional explanation and disclosure regarding the securitization of RALs refer to Note 8 and Note 7, “RAL and RT Programs” of the Consolidated Financial Statements of this 10-Q and the 2007 10-K, respectively.

NON-INTEREST EXPENSE

The following table summarizes the changes in non-interest expenses for the comparable quarters:


	*Three-Months Ended* *September 30,*
					*Change*
	*2008*		*2007*		$		%
	(in thousands)
Non-interest expense:
Salaries and employee benefits	$	28,593	$	26,987	$	1,606	6.0%
Goodwill impairment		22,068		—		22,068	N/A
Occupancy expenses, net		6,178		5,552		626	11.3%
Furniture, fixtures and equipment, net		2,291		2,224		67	3.0%
Other		23,041		17,412		5,629	32.3%

Total	$	82,171	$	52,175	$	29,996	57.5%

The Company’s non-interest expenses increased by $30.0 million, or 57.5% for the third quarter of 2008 compared to the third quarter of 2007. The majority of this increase is due to the charge for the impairment of the goodwill of $22.1 million and increased other non-interest expenses of $5.6 million for the comparable periods.

Goodwill is tested for impairment during the third quarter of each year or if management determines there is a triggering event which may indicate a need to review goodwill for impairment. In order to determine the fair value of each reporting unit in the third quarter of 2008, the Company reviewed the capitalized earnings of each reporting unit, the outlook of the current economic environment and took into consideration the transaction multiples of publicly traded financial institutions adjusted for a change in control. When the fair value of a reporting unit is less than its carrying value, the Company is required to utilize a Step 2 valuation approach in accordance with SFAS 142. All of the Company’s reporting units passed Step 1 of the annual SFAS 142 impairment analysis in the third quarter of 2008, except the Commercial Banking segment. The Step 2 goodwill impairment analysis of the Commercial Banking segment required the Step 1 fair value of the reporting unit to be allocated to all of the fair values of the underlying tangible and intangible assets and liabilities for purposes of calculating the fair value of goodwill. This allocation resulted in a $22.1 million goodwill impairment recorded in the third quarter of 2008. The goodwill impairment testing was performed by an independent third party. The goodwill impairment calculation is an estimate subject to ongoing review as certain circumstances may cause additional impairment to be assessed in the future. As such, the Company used primarily level 3 inputs in its fair value of Goodwill.

Other non-interest expenses increased by $5.6 million or 32.3% for the three month period ended September 30, 2008 compared to 2007. The increase was primarily due to increases in the reserve for off-balance sheet commitments of $2.9 million and a net accrual for a probable settlement of litigation of $2.6 million.

The increase in reserve of $2.7 million for off balance sheet commitments is to cover inherent losses from binding loan commitments to the extent that they are expected to be funded, including other off-balance sheet obligations such as letters of credit, fair value swaps with commercial loan customers and commitments for lines of credit and all types of loans. Included in this reserve are the same qualitative factors as employed in the on-balance sheet allowance for loan loss methodology which is the driving factor of this increase due to the current economic conditions.

The lawsuit settlement, net of $2.6 million, relates to the lawsuit disclosed in Note 12, “Commitments and Contingencies” as the Canieva Hood and Congress of California Seniors v. Santa Barbara Bank & Trust, Pacific Capital Bank, N.A., and Jackson-Hewitt, Inc.. The amount recorded is an accrual based on a tentative settlement agreement that is subject to the execution of a definitive settlement agreement and court approval.

The following table summarizes the changes in non-interest expenses for the comparable nine month periods:


	*Nine-Months Ended* *September 30,*
					*Change*
	*2008*		*2007*		$			%
	(in thousands)
Non-interest expense:
Salaries and employee benefits	$	94,598	$	93,867	$	731		0.8%
Refund program marketing and technology fees		46,257		44,500		1,757		3.9%
Goodwill impairment		22,068		—		22,068		N/A
Occupancy expenses, net		19,192		16,440		2,752		16.7%
Furniture, fixtures and equipment, net		6,871		7,301		(430	)	(5.9%)
Other		79,722		62,024		17,698		28.5%

Total	$	268,708	$	224,132	$	44,576		19.9%

The Company’s non-interest expenses for the nine month period ended September 30, 2008 period compared to 2007 increased by $44.6 million, or 19.9%. The majority of this increase is due to the charge for the impairment of the goodwill of $22.1 million as discussed above on page 48 and increases in other non-interest expenses, occupancy expense and refund program marketing and technology fees of $17.7 million, $2.8 million, and $1.8 million, respectively for the nine months ended September 30, 2008 compared to 2007.

The increase in other expenses is primarily due to increases in RAL and RT developer performance fees of $7.2 million, reserve for off-balance sheet commitments of $6.5 million, litigation accrual of $2.6 million, software expenses of $2.2 million partially offset by a decline in consulting expense for the comparable periods of $1.6 million. The increase in RAL and RT performance fees is the result of contractual volume incentive fee increases due to the increased volume for the 2008 RAL season. The Company recorded additional expense to increase the off-balance sheet reserve compared to 2007 as disclosed in Note 5, “Loans” of this Form 10-Q. The litigation accrual is discussed above on page 48. The increase in software expense is mostly attributed to depreciation expense associated with capitalized software which had not been depreciating since January 2007 which was discovered and corrected during the second quarter of 2008. Management concluded that the amount of the error and the correction was not material to the Company’s financial statements for any period presented in 2007 or 2008.

PROVISION FOR INCOME TAXES

The Company recorded a $21.1 million tax benefit for the third quarter of 2008 compared to a tax benefit of $3.2 million for the third quarter of 2007. For the nine months ended September 30, 2008, the Company incurred tax expense of $13.3 million compared to $51.3 million for the comparable period in 2007. The decrease in tax expense (or increase in tax benefit) for the comparable periods is the result of lower pretax income.

Excluding the impact of a nondeductible goodwill impairment charge of $22.1 million as disclosed in Note 13, “Fair Value of Financial Instruments” on page 29, the Company’s effective tax rate for the nine months ended September 30, 2008 was 24.44%, compared to 2007’s full year rate of 35.77%. Including the impact of the goodwill impairment charge, the Company’s effective tax rate for the nine months ended September 30, 2008 was 41.08%.

The effective tax rate for the three month period ended September 30, 2008 was 30.73%. The 41.08% effective tax rate for the first nine months of 2008 was calculated based on the actual results for the first nine months of 2008 and not on a projected annual effective tax rate. The annual effective tax rate cannot be predicted due to the potential variability in future financial results. The unusual tax rate for 2008 is primarily due to a $22.068 million goodwill impairment charge that is non-deductible for income tax purposes.

BALANCE SHEET ANALYSIS

Total assets increased $314.3 million and total liabilities increased by $340.3 million since December 31, 2007. The major components causing these increases are described in the following sections.

CASH AND CASH EQUIVALENTS

The Company’s cash and cash equivalents increased by $36.9 million or 26.2% to $178.0 million at September 30, 2008, compared to December 31, 2007. This increase is due to the Company retaining more cash on hand and, investing in overnight federal funds to maintain additional liquidity due to the current credit crisis and low interest rates in other short term investments types.

SECURITIES

Trading Portfolio

The Company’s trading portfolio increased by $55.7 million or 37.9% since December 31, 2007. This increase occurred from the restructuring of the investment portfolio for the current interest rate environment by reducing the duration of the MBS portfolios held in trading and AFS investment portfolios. Since December 31, 2007, the Company has purchased $213.4 million of MBS for the trading portfolio of which $145.8 million of MBS were purchased in the third quarter with a weighted average maturity of 14.3 years. These purchases were offset with sales of $146.7 million and principal pay downs of $12.6 million of MBS.

Available for Sale (“AFS”) Portfolio

The AFS investment securities portfolio declined $186.8 million, or 15.9% to $990.1 million at September 30, 2008, compared to December 31, 2007. A summary of the activity in the AFS portfolio since December 31, 2007 is as follows:


	*Activity January 1, 2008 through September 30, 2008*
	*Purchases*		*Sales*			Calls and Maturities			Principal Pay Downs			Change in Market Value			(Amortization) or Accretion of Premium or Discount
	(in thousands)
U.S. Treasury obligations	$	11,431	$	—		$	(25,000	)	$	—		$	112		$	133
U.S. Agency obligations		249,337		—			(291,023	)		—			(3,392	)		749
Collateralized mortgage obligations		—		—			—			(2,524	)		(1,167	)		16
Mortgage-backed securities		—		(123,716	)		—			(41,518	)		2,285			(1	)
Asset-backed securities		—		—			—			(231	)		(399	)		—
State and municipal securities		70,731		—			(7,550	)		—			(27,348	)		6,416

Total	$	331,499	$	(123,716	)	$	(323,573	)	$	(44,273	)	$	(29,909	)	$	7,313

In addition, there was $4.2 million of other than temporary impairment associated with the AFS MBS securities which also reduced the carrying value of the AFS portfolio.

LOAN PORTFOLIO

Loans Held for Investment

The following table summarizes loans held for investment:


	*September 30,* *2008*		*December 31,* *2007*		*Change*
	*September 30,* *2008*		*December 31,* *2007*		$			%
	(in thousands)
Real estate:
Residential—1 to 4 family	$	1,100,608	$	1,075,663	$	24,945		2.3%
Multi-family residential		265,261		278,935		(13,674	)	-4.9%
Commercial		1,929,225		1,558,761		370,464		23.8%
Construction		605,563		651,307		(45,744	)	-7.0%
Commercial loans		1,194,805		1,196,808		(2,003	)	-0.2%
Home equity loans		426,921		394,331		32,590		8.3%
Consumer loans		196,164		200,094		(3,930	)	-2.0%
RALs		1,600		—		1,600		N/A
Other loans		2,067		3,257		(1,190	)	-36.5%

Total loans	$	5,722,214	$	5,359,156	$	363,058		6.8%

Total loans increased by $363.1 million or 6.8% from December 31, 2007 to September 30, 2008. A majority of the growth in the loan portfolio was in commercial real estate portfolio with $370.5 million of growth. The Company is able to increase the growth in the loan portfolio due to the Bank’s strong capital position. At the same time, the Company is being selective in the amount and type of loans originated and increased the loan underwriting standards. The Company has sold select residential real estate loans and retained servicing rights in order to maintain our customer relationships.

The Company offers loans to individuals and small to medium size businesses. The Community Banking segment consists of loans and lines of credit for home mortgages, small businesses and personal use. The Commercial Banking segment consists of commercial lines of credit, letters of credit, small business lending and asset-based lending products. The Wealth Management segment serves customers who meet certain net-worth, income and liquidity criteria. A more detailed description of each segment and the loan products offered is disclosed in the 2007 10-K.

Loans Held for Sale

At September 30, 2008, the Company held $145.4 million of loans held for sale. All of the loans classified as loans held for sale at September 30, 2008 were sold or transferred during October 2008. The loans classified as held for sale were $88.2 million of residential loans, $22.6 million of SBA loans and $10.5 million of residential loans which were transferred to securities. Also included in loans held for sale were $24.0 million of loans sold in conjunction with the sale of the Santa Paula and Harvard branches transaction. As disclosed in Note 16, “Subsequent Events”, the Company increased the amount of loans sold in conjunction with the Santa Paula and Harvard branch sale after the preparation of September 30, 2008 financial statements.

At December 31, 2007, the Company had $68.3 million of adjustable rate residential loans classified as held for sale. On January 4, 2008, $68.2 million of these loans were converted to MBS and placed in the Company’s trading portfolio. The remainder of the loans held for sale, were also sold in January 2008.

ALLOWANCE FOR LOAN LOSSES (“ALLL”)

Total ALLL increased by $77.3 million to $122.1 million at September 30, 2008 from $44.8 million at December 31, 2007. The increase to ALLL is primarily due to an increase in qualitative factors associated with the inherent loan losses in the loan portfolio associated with the deterioration of the economy, an increase in nonaccrual loans of $64.8 million and an increase in net charge-offs of $71.5 million since December 31, 2007. The net charge-offs of $71.5 million is comprised of $48.8 million of Core Bank net charge-offs and $22.7 million of net charge-offs of RALs for the year to date period ending September 30, 2008 compared to net charge-offs of $19.2 million for the Core Bank and $94.0 million of net charge-offs of RALs for the year to date period ended September 30, 2007. The increase in ALLL improves the ratio of ALLL to total loans to 2.13% and 73.4% of nonperforming loans to ALLL which is significantly higher than in prior quarters. Management believes that this increase in ALLL will better position the Company to manage anticipated loan losses through the forecasted prolonged economic downturn impacting all of the Company’s loan portfolios.

NONPERFORMING LOANS

The table below summarizes the Company’s nonperforming assets and loan quality ratios.


	September 30, 2008			June 30, 2008			December 31, 2007			September 30, 2007
	(dollars in thousands)
Nonaccrual loans	$	136,940		$	136,300		$	72,186		$	21,956
Loans past due 90 days or more on accrual status		445			749			1,131			864
Troubled debt restructured loans		29,022			21,050			—			—

Total nonperforming loans		166,407			158,099			73,317			22,820
Foreclosed collateral		5,181			3,695			3,357			2,910

Total nonperforming assets	$	171,588		$	161,794		$	76,674		$	25,730

Allowance for loan losses, Core Bank	$	122,097		$	73,288		$	44,843		$	40,375
Allowance for loan losses, RALs		—			—			—			—

Total allowance for loan losses, Consolidated	$	122,097		$	73,288		$	44,843		$	40,375

COMPANY RATIOS—Consolidated:
Coverage ratio of allowance for loan losses to total loans		2.13	%		1.29	%		0.84	%		0.73	%
Coverage ratio of allowance for loan losses to nonperforming loans		73	%		46	%		61	%		177	%
Ratio of nonperforming loans to total loans		2.91	%		2.78	%		1.37	%		0.41	%
Ratio of nonperforming assets to total assets		2.23	%		2.16	%		1.04	%		0.35	%
Ratio of allowance for loan losses to potential problem loans and nonperforming loans		26.33	%		18.01	%		31.07	%		49.57	%

COMPANY RATIOS—Core Bank:
Coverage ratio of allowance for loan losses to total loans		2.13	%		1.29	%		0.84	%		0.73	%
Coverage ratio of allowance for loan losses to nonperforming loans		73	%		46	%		61	%		177	%
Ratio of nonperforming loans to total loans		2.91	%		2.78	%		1.37	%		0.41	%
Ratio of nonperforming assets to total assets		2.23	%		2.16	%		1.04	%		0.36	%
Ratio of allowance for loan losses to potential problem loans and nonperforming loans		26.33	%		18.01	%		31.07	%		49.57	%

Total nonperforming loans increased to $166.4 million at September 30, 2008 from $73.3 million at December 31, 2007, an increase of $93.1 million. Nonperforming loans at September 30, 2008 are mostly comprised of construction loans

which account for 66.0% of nonperforming loans and commercial and industrial loans which account for 10.8% of nonperforming loans. The remainder of nonperforming loans are spread over the other loan portfolios.

Since December 31, 2007, troubled debt restructured loans increased to $29.0 million. The troubled debt restructurings consist of a $19.0 million residential construction loan relationship, commercial and industrial loans of $8.0 million and residential loans of $2.0 million. Foreclosed collateral increased to $5.2 million at September 30, 2008, an increase of $1.5 million since June 30, 2008. The increase in foreclosed collateral relates to six loans of which three loans were charged off and three loans had an outstanding balance and were foreclosed on during the third quarter of 2008 which are secured by land and residential real estate. The Company subsequently closed escrow on one of the foreclosed properties.

Nonaccrual Loans: Loans on which the accrual of interest is discontinued and any unpaid but accrued interest is reversed at the time the loan is placed on nonaccrual. These loans may be collateralized. Collection efforts are pursued on all nonaccrual loans. Historically, consumer loans are an exception to this treatment. Typically, they are charged-off at predetermined delinquency benchmarks based on product type and collateral value. All consumer loans are charged-off no later than 120 days past due.

Collection efforts continue even after charge-off.

Past Due Loans: Included in the table above as “loans past due 90 days or more on accrual status” are commercial and industrial, real estate, and other secured consumer loans. These loans are well collateralized and in the process of collection.

Foreclosed Collateral: Foreclosed collateral consists primarily of real estate properties obtained through foreclosure or accepted in lieu of foreclosure.

OTHER ASSETS

Other assets at September 30, 2008 were $353.4 million compared to $284.1 million at December 31, 2007, an increase of $69.3 million or 24.4%. This increase is mostly attributable to the following items:

Due to the net loss of $47.5 million recorded in the third quarter and the reduction of year to date income, the tax liability is now a tax receivable of $22.8 million,

an increase of $13.1 million associated with the recorded fair value of the interest rate swaps which are perfectly matched and require the off balance sheet exposure be recorded in the Company’s balance sheet,

an increase of $12.6 million in deferred tax assets associated with the changes in market values of the AFS portfolio and,

a $10.8 million increase in the Company’s investment of FHLB stock due to increased FHLB borrowings. The Company is required to increase the investment in FHLB Stock.

An increase of $4.3 million in the Company’s investments in low-income housing partnerships.

DEPOSITS

The following table summarizes the deposits.


	*September 30,* *2008*		*December 31,* *2007*		*Change*
	*September 30,* *2008*		*December 31,* *2007*		$			%
	(dollars in thousands)
Non-interest bearing deposits	$	989,025	$	1,002,281	$	(13,256	)	-1.3%

Interest-bearing deposits:
NOW accounts		995,181		1,145,655		(150,474	)	-13.1%
Money market deposit accounts		561,297		748,417		(187,120	)	-25.0%
Other savings deposits		261,085		254,273		6,812		2.7%
Time certificates of $100,000 or more		1,234,196		1,063,271		170,925		16.1%
Other time deposits		900,520		749,915		150,605		20.1%

Total deposits	$	4,941,304	$	4,963,812	$	(22,508	)	-0.5%

The Company’s deposits decreased by $22.5 million from December 31, 2007 to September 30, 2008 as the environment for collecting deposits continues to be challenging for all financial institutions. This decrease is mostly attributed to declining interest rates paid on NOW and money market accounts which have caused many of the Bank’s customers to move their deposits into higher yielding time deposits.

The increase in time certificates of deposits (“CD”) of $321.5 million since December 31, 2007 is mostly the result of the Bank’s CD campaigns that have attracted new customers and are providing cross-selling opportunities for our other deposit, loan and wealth management products. The Bank has been aggressively pricing CDs to retain customers and maintain the customer relationships as well as become less dependent on wholesale borrowing to fund loans. Included in the $321.5 million increase in CDs are $67.0 million of brokered CDs. Brokered CDs are large short-term deposits which assist with providing funding for the RAL Program as well as loans held for investment.

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase were $349.9 million at September 30, 2008, an increase of $84.1 million or 31.6% since December 31, 2007. Since December 31, 2007, securities sold under agreements to repurchase have been used as both a short-term and long-term funding source for the growth in loans. Long-term securities sold under agreements to repurchase have increased $150.0 million due to additional and renewed long-term commitments with a weighted average rate of 3.31%. This increase was offset by a decrease in short-term borrowings of securities sold under agreements to repurchase of $65.9 million.

LONG-TERM DEBT AND OTHER BORROWINGS

Long-term debt and other borrowings increased by $255.4 million or 18.2% when comparing September 30, 2008 to December 30, 2007. This increase is due to the growth in loans outpacing the growth in deposits and, therefore the Bank relies on wholesale borrowings from the FHLB to fund the loan growth which is causing this increase.

CAPITAL RESOURCES

As of September 30, 2008, under current regulatory definitions, the Company and PCBNA met the regulatory standards of “well-capitalized,” as defined under the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”).

Capital Adequacy Standards

The Company and PCBNA are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements as specified by the regulatory framework for prompt corrective action could cause the regulators to initiate certain mandatory or discretionary actions that, if undertaken, could have a direct material effect on the Company’s financial statements.

The Company’s and PCBNA’s capital ratios as of September 30, 2008 and December 31, 2007 were as follows:


	Total Capital		Tier 1 Capital		Risk Weighted Assets		Tangible Average Assets		Total Capital Ratio		Tier 1 Capital Ratio		Tier 1 Leverage Ratio
	(dollars in thousands)
*September 30, 2008*
PCB (consolidated)	$	752,523	$	573,645	$	6,308,465	$	7,469,827	11.9	%	9.1	%	7.7	%
PCBNA		753,039		574,223		6,303,486		7,461,625	11.9	%	9.1	%	7.7	%

*December 31, 2007*
PCB (consolidated)	$	720,625	$	568,075	$	5,847,905	$	7,126,286	12.3	%	9.7	%	8.0	%
PCBNA		701,225		548,675		5,841,648		7,109,129	12.0	%	9.4	%	7.7	%

Well-capitalized ratios									10.0	%	6.0	%	5.0	%
Minimum capital ratios									8.0	%	4.0	%	4.0	%

The minimum capital ratios the Company must maintain under the regulatory requirements to meet the standard of “adequately capitalized” and the minimum amounts and ratios required to meet the regulatory standards of “well capitalized” are included in the table above at September 30, 2008 and December 31, 2007.

For the Company, Tier 1 capital generally consists of common stock, surplus, and retained earnings. Tier 2 capital includes a portion of the allowance for loan losses and the subordinated debt discussed in Note 14, “Long-term Debt and Other Borrowings” of the 2007 10-K. The capital benefit of the subordinated debt is reduced 20% per year in the last five years of its term.

Risk-weighted assets are computed by applying a weighting factor from 0% to 100% to the carrying amount of the assets as reported in the balance sheet and to a portion of off-balance sheet items such as loan commitments and letters of credit. The definitions and weighting factors are all contained in the regulations. However, the capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

PCB is the parent company and sole owner of PCBNA. However, there are legal limitations on the amount of dividends, which may be paid by PCBNA to PCB. The amounts that may be paid as dividends by a bank are determined based on the bank’s capital accounts and earnings in prior years. As of September 30, 2008, PCBNA would have been permitted to pay up to $340.2 million as dividends to PCB.

Stock Repurchases

In 2007, the Company commenced and completed the share repurchase program of $25.0 million authorized by the Company’s Board of Directors. There is currently no share repurchase program authorized by the Board of Directors.

Stock Issuances

In September 2008, the Company authorized additional shares to be issued in conjunction with the “Dividend Reinvestment and Direct Stock Purchase Plan” which authorized 3,500,000 additional shares for raising additional capital. During October 2008, 407,000 shares were issued and $7.2 million of proceeds were received.

Future Sources of Capital

On November 5, 2008, the Company received preliminary approval for the U.S. Treasury’s Troubled Asset Relief Capital Purchase Program (“CPP”) in the amount of 3% of our risk weighted assets (“RWA”) as allowed under the CPP. Based on the Bank’s RWA at September 30, 2008, this will provide approximately $189.1 million of additional capital. The Company has 30 days from the date of approval to supply all of the required documentation to complete the approval process. Under the terms of such approval, the Company may issue to the U.S. Treasury up to approximately $189.1 million, of 3.0% of the Bank’s risk weighted assets at September 30, 2008, of senior preferred shares. The senior preferred shares would pay a cumulative dividend of 5.0% in the first five years and 9.0% thereafter. The Company will also issue to the U.S. Treasury warrants to purchase common stock with an aggregate market price equal to 15.0% of the senior preferred shares which are issued to the U.S. Treasury.

The additional capital received from the CPP will assist the Company with the following items:

The Company intends to be one of the long term survivors of this current credit cycle and of the economic conditions that the Banking Industry and our U.S. Economy faces today. While the Company has currently met the regulatory standards of “well capitalized”, the future of the Banking Industry and the Economy is uncertain and the Company believes that a well fortressed balance sheet via additional capital and even stronger capital ratios at this time is prudent to ensure the safety and soundness of the Company should the marketplace deteriorate further in the future. Management believes that the additional capital and improved capital ratios will help to reassure the public and our customers that the Company is a very strong bank, which will help to reassure public confidence in our Company and in the banking infrastructure within our marketplace.

During 2008, Management has seen the ALLL as a percentage of total loans has gone from 84 basis points at December 31, 2007, to 213 basis points at September 30, 2008. We have also seen our ALLL as a percentage of nonperforming Loans go from approximately 61% to approximately 73% over this same time period. It is clear that the Company has seen increases in our delinquency rates and charge off rates, though not to the same extent that certain other banks in California or throughout the U.S. have seen. These increases in ALLL and charge-off’s obviously effect the Company’s capital ratios and the Company’s Management team believes that it is very important and prudent to continue to bolster our reserves during this period of economic uncertainty to further demonstrate our desire to be in front of any current/future issues that may arise to ensure the safety and soundness of our Bank; and to reassure public confidence in our Company and in the banking infrastructure within our marketplace.

Management has seen our marketplace and across the U.S., the Banking Industry has tightened up, and in some cases shut off, its lending activities to well qualified companies and individuals. We believe that this lack of credit availability in the marketplace hurts all companies and individuals as it will drive our economy into a recession. The Company’s Management team plans to continue its prudent lending activities, and possibly even expand them within our footprint during this time of economic crisis to well qualified borrowers (both individuals and companies). The additional capital from the CPP will allow us to do this in a well capitalized manner.

Uses of Capital and Expected Ratios

Net income is the major source of capital growth for the Company while dividends distributed to shareholders reduce capital. The Company’s dividend payout ratio was 41.1% for 2007 and the Company anticipates that dividend payout amounts for 2008 will be consistent with 2007 in total. The share repurchases made by the Company in the third and fourth quarters of 2007 reduced the impact to retained earnings from 2008 dividend payments.

There are three primary considerations Management must consider in managing capital levels and ratios. The first is that the Company must be able to meet the credit needs of our customers when they need to borrow. The second consideration is that the Company must be prepared to sell some of the loans it originates in order to manage capital targets. The third consideration is that as loan demand increases, raising additional capital may be necessary. Management investigates the issuance of alternate forms of raising capital on an on-going basis.

In addition to the capital generated from the operations of the Company, a secondary source of capital growth has been the exercise of employee and director stock options. For the period of January 1, 2008 to September 30, 2008, the increase to capital from the exercise of options was $268,000.

There are no material commitments for capital expenditures or “off-balance sheet” financing arrangements at September 30, 2008.

Management intends to take the actions necessary to ensure that the Company and the Bank will continue to meet the capital ratios required for well-capitalized institutions.

Impact of RAL/RT Programs on Capital Adequacy

Formal measurement of the capital ratios for the Company and PCBNA are done at each quarter-end. However, the Company does more frequent estimates of its capital classification during late January and early February of each year because of the large volume of RALs originated. RALs are 100% risk weighted and impact the Company’s capital ratios during late January and early February of each year. Due to the impact of RALs on the Company’s capital ratios, Management monitors the Company’s capital ratios daily during these months. Management estimates that, if a formal computation of capital ratios were done on certain days during those weeks PCB and PCBNA may be classified as adequately capitalized, rather than well-capitalized. The Company has discussed this with its regulators and creditors.

In Note 7, “RAL and RT Programs” of the 2007 10-K contains a description of the securitization that the Company utilizes as one of its sources for funding RALs and in Note 8, “RAL and RT Programs” of these Consolidated Financial Statements of this 10-Q. The RAL securitization is a true sale of loans to other financial institutions, and except for the capital that must be allocated for the small-retained interest kept by the Company, the sale of RALs reduce the impact of RALs on the capital ratios for the Company.

LIQUIDITY

Liquidity is the ability to effectively raise funds on a timely basis to meet cash needs of our customers and the Company, whether it is to handle fluctuations in deposits, to provide for customers’ credit needs, or to take advantage of investment opportunities as they are presented in the market place.

The Company’s objective, managed through the Company’s Asset and Liability Committee (“ALCO”), is to ensure adequate liquidity at all times by maintaining adequate liquid assets, the ability to raise deposits and liabilities, and having access to additional funds via the capital markets.

The Company manages the adequacy of its liquidity by monitoring and managing its short-term liquidity, intermediate liquidity, and long-term liquidity. ALCO monitors and sets policy and related targets to ensure the Company maintains adequate liquidity. The monitoring of liquidity is done over the various time horizons, to avoid over dependence on volatile sources of funding and to provide a diversified set of funding sources. These targets are increased during certain periods to accommodate any liquidity risks of special programs like RALs.

Short-term liquidity is the ability to raise funds on an overnight basis. Sources of short-term liquidity include, but are not limited to, Federal funds purchased, FHLB short-term advances and securities sold under agreements to repurchase (“repurchase agreements”).

Intermediate liquidity is the ability to raise funds during the next few months to meet cash obligations over those next few months. Sources of intermediate liquidity include maturities or sales of securities, term repurchase agreements, and term advances from the FHLB.

Long-term liquidity is the ability to raise funds over the entire planning horizon to meet cash needs anticipated due to strategic balance sheet changes. Long-term liquidity sources include: initiating special programs to increase core deposits in expanded market areas; reducing the size of securities portfolios; taking long-term advances with the FHLB; securitizing or selling loans; and accessing capital markets for the issuance of debt or equity.

Federal funds purchased and overnight repurchase agreements are used to balance short-term mismatches between cash inflows from deposits, loan repayments, and maturing securities and cash outflows to fund loans, purchase securities and deposit withdrawals on a day-to-day basis.

For the Company, the most significant challenge relating to liquidity management is providing sufficient liquidity to fund the large amount of RALs, primarily in late January and early February of each year. In addition to the discussion above, the following considerations are kept in mind in providing the needed liquidity:

Using a large number of institutions so as to not become overly reliant on a limited number of institutions or a particular type of funding vehicle;

Using a mixture of committed and uncommitted lines so as to assure a minimum amount of funding in the event of tight liquidity in the markets; and

Arranging for at least 30% more funding than anticipated on the peak-funding days for RALs.

The securitization of RALs assists in the management of the Company’s capital position during the RAL season by selling some RALs to third parties. In addition, the securitization program represents yet another source of liquidity as the proceeds from the sales are lent out to new RAL customers.

RALs generally present the Company with some special funding and liquidity needs. The Company was successful in planning for the liquidity needs for the 2008 RAL peak funding season of January and February. Additional funds are needed for RAL lending only for the very short period of time that RALs are outstanding. The RAL funding season starts in January and continues into April, but even within that time frame, RAL originations are highly concentrated in the last week of January and first two weeks of February. Each year, the Company must arrange for a significant amount of very short-term borrowing capacity. A portion of the funding need can be met by borrowing overnight from other financial institutions through the use of Federal funds purchased and repurchase agreements. These two sources match the short-term nature of the RALs and therefore are an efficient source of funding. However, they are not sufficient to meet the total need for funds and other sources such as advances from the FHLB and brokered deposits must be utilized. Extensive funding planning is accomplished prior to the RAL season to make effective and efficient use of various funding sources. Management is currently in the process of planning and arranging for the capital and liquidity needs for the 2009 RAL season. In 2008, Management was successful in executing its plan to meet the funding needs for RAL. In fact, in 2008, the Company experienced excess liquidity during the peak RAL season, and Management was able to reinvest funds in short-term investments such as commercial paper, securities purchased under agreements to resale and federal funds sold.

As of September 30, 2008, the Company’s liquidity ratio, which is the ratio of liquid assets of cash and cash equivalents, investment securities from the trading and AFS portfolios, federal funds sold and loans held for sale divided by short-term liabilities of demand deposits, repurchase agreements and federal funds purchased was 47.9%, compared to 44.8% at December 31, 2007. The Company’s liquidity ratio increased in September 2008 compared to December 2007 as a result of a decrease of federal funds purchased. Total available liquidity as of September 30, 2008 was $1.52 billion.

At September 30, 2008, the Company had available borrowing capacity of $362.9 million at the FHLB and $838.9 million of borrowing capacity with the FRB. This borrowing capacity is utilized to fund loans when loan growth outpaces deposit growth.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As described in the MD&A Recent Developments section, global capital markets and economic conditions continue to be adversely affected and the resulting disruption has been particularly acute in the financial sector. Although the Company remains well capitalized and has not suffered any significant liquidity issues as a result of these recent events, the cost and availability of funds may be adversely affected by illiquid credit markets and the demand for our products and services may decline as our borrowers and customers realize the impact of an economic slowdown and recession. In addition, the severity and duration of these adverse conditions is unknown and may exacerbate the Company’s exposure to credit risk and adversely affect the ability of borrowers to perform under the terms of their lending arrangements with us. Accordingly, continued turbulence in the U.S. and international markets and economy may adversely affect our liquidity, financial condition, results of operations and profitability.

In response to the financial crises affecting the overall banking system and financial markets in the United States, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted. Under that act, the United States Treasury Department (“Treasury”) has authority, among other things, to purchase mortgages, mortgage backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.

On October 3, 2008, the Troubled Asset Relief Program (“TARP”) was signed into law. TARP gave the Treasury authority to deploy up to $700 billion into the financial system with an objective of improving liquidity in capital markets. On October 24, 2008, Treasury announced plans to direct $250 billion of this authority into preferred stock investments in banks. On November 5, 2008, the Company received preliminary approval to participate in CPP with approval of 3% of the Bank’s risk weighted assets. At September 30, 2008, the Bank had $6.3 billion of risk weighted assets which, is approximately $189.1 million of additional capital that the TARP program has preliminarily approved. The general terms of this preferred stock program include:

dividends on the Treasury’s preferred stock at a rate of 5% for the first five years and 9% dividends thereafter;

common stock dividends cannot be increased for three years while Treasury is an investor unless preferred stock is redeemed or consent from Treasury is received;

the Treasury preferred stock cannot be redeemed for three years unless the participating bank raises qualifying private capital;

Treasury must consent to any buy back of other stock (common or other preferred);

Treasury receives warrants equal to 15% of Treasury’s total investment in the participating institution; and

participating institution’s executives must agree to certain compensation restrictions, and restrictions on the amount of executive compensation which is tax deductible.

The term of this Treasury preferred stock program could reduce investment returns to participating banks’ shareholders by restricting dividends to common shareholders, diluting existing shareholders’ interests, and restricting capital management practices. Although both PCB and the Bank and its banking subsidiary meet all applicable regulatory capital requirements, the Company reduced preliminary approval on November 5, 2008.

Federal and state governments could pass additional legislation responsive to current credit conditions. As an example, the Company could experience higher credit losses because of federal or state legislation or regulatory action that reduces the principal amount or interest rate under existing loan contracts. Also, the Company could experience higher credit losses because of federal or state legislation or regulatory action that limits the Bank’s ability to foreclose on property or other collateral or makes foreclosure less economically feasible.

The Federal Deposit Insurance Corporation (“FDIC”) insures deposits at FDIC insured financial institutions up to certain limits. The FDIC charges insured financial institutions premiums to maintain the Deposit Insurance Fund. Current economic conditions have increased expectations for bank failures, in which case the FDIC would take control of failed banks and ensure payment of deposits up to insured limits using the resources of the Deposit Insurance Fund. In such case, the FDIC may increase premium assessments to maintain adequate funding of the Deposit Insurance Fund, including requiring riskier institutions to pay a larger share of the premiums. An increase in premium assessments would increase the Company’s expenses. The EESA included a provision for an increase in the amount of deposits insured by FDIC to $250,000 until December 2009. On October 14, 2008, the FDIC announced a new program — the Temporary Liquidity Guarantee Program that provides unlimited deposit insurance on funds in noninterest-bearing transaction deposit accounts not otherwise covered by the existing deposit insurance limit of $250,000. All eligible institutions will be covered under the program for the first 30 days without incurring any costs. After the initial period, participating institutions will be assessed an annualized 10 basis point surcharge on the additional insured deposits. The behavior of depositors in regard to the level of FDIC insurance could cause the Bank’s existing customers to reduce the amount of deposits held at the Bank, and or could cause new customers to open deposit accounts at the Bank. The level and composition of the Bank’s deposit portfolio directly impacts the Bank’s funding cost and net interest margin. As a result of these measures, it is likely that the premiums the Bank pays for FDIC insurance will increase, which would adversely affect net income. The impact of such measures cannot be assessed at this time.

The actions described above, together with additional actions announced by the Treasury and other regulatory agencies continue to develop. It is not clear at this time what impact the EESA, CPP and other liquidity and funding initiatives of the Treasury and other bank regulatory agencies that have been previously announced, and any additional programs that may be initiated in the future will have on the financial markets and the financial services industry. The extreme levels of volatility and limited credit availability currently being experienced could continue to effect the U.S. banking industry and the broader U.S. and global economies, which will have an affect on all financial institutions, including the Company.

Risk definition and assessment allows the Company to select the appropriate level of risk for the anticipated level of reward and then decide on the steps necessary to manage this risk. The key risk factors affecting the Company’s business are addressed in Item 1A, Risk Factors in the Company’s 2007 10-K.

Changes in interest rates can potentially have a significant impact on the Company’s earnings. The Company has addressed the risks associated with interest rate risk in the section below.

INTEREST RATE RISK

The Company’s recent interest rate risk management activities have been focused on reducing the impact of rising and falling interest rates by taking a more neutral position. The forward looking interest rate curves and markets are now anticipating the Federal Reserve will revert to a policy of tightening interest rates in the first quarter of 2009.

With such a large proportion of the Company’s income derived from net interest income, it is important to understand how the Company is subject to interest rate risk.

In general, for a given change in interest rates, the amount of the change in value up or down is larger for instruments with longer remaining maturities. The shape of the yield curve may affect new loan yields and funding costs differently.

The remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change. For example, if long-term mortgage interest rates decline sharply, higher fixed-rate mortgages may prepay, or pay down, faster than anticipated, thus reducing future cash flows and interest income.

Repricing frequencies and maturity profiles for assets and liabilities may occur at different times. For example, in a falling rate environment, if assets reprice faster than liabilities, there will be an initial decline in earnings. Moreover, if assets and liabilities reprice at the same time, they may not be by the same increment. For instance, if the Federal funds rate increased 50 bps, demand deposits may rise by 10 bps, whereas prime based loans will instantly rise 50 bps.

Monthly evaluations, monitoring and management of interest rate risk (including market risk, mismatch risk and basis risk) compare our most likely rate scenario, base case, with various earnings simulations using many interest rate scenarios. These scenarios differ in the direction of interest rate changes, the degree of change over time, the speed of change and the projected shape of the yield curve. These results are prepared by the Company’s Treasury Department and presented to the ALCO each month for further consideration.

Financial instruments do not respond in a parallel fashion to rising or falling interest rates. This causes asymmetry in the magnitude of changes in net interest income and net economic value resulting from the hypothetical increases and decreases in interest rates. Therefore, it is mandatory to monitor interest rate risk and adjust the Company’s funding strategies to mitigate adverse effects of interest rate shifts on the Company’s balance sheet. In the future, however, other strategies may be implemented to manage interest rate risk. These strategies may include, but may not be limited to, utilizing interest rate derivatives, buying or selling loans or securities, utilizing structured repurchase agreements and entering into other interest rate risk management instruments and techniques.

Net Interest Income (“NII”) and Economic Value of Equity (“EVE”) Simulations

The results of the asset liability model indicate how much of the Company’s net interest income and net economic value are “at risk” (deviation from the base case) from 2% shocks. This exercise is valuable in identifying risk exposures and in comparing the Company’s interest rate risk profile relative to other financial intermediaries.

Simulation estimates depend on, and will change, with the size and mix of the actual and projected balance sheet at the time of each simulation. Management is unaware of any material limitations such that results would not reflect the net interest risk exposures of the Company. However, no model is a perfect description of the complexity of a bank’s balance sheet, and actual results are certain to differ from any model’s predicted results. There are no material positions, instruments or transactions that are not included in the modeling or included instruments that have special features that are not included.

The EVE and NII results as of September 30, 2008 and September 30, 2007 are displayed in the table below.

RATE SENSITIVITY SUMMARY

LOGO

The EVE value at risk at September 30, 2008 was within the adopted ALCO policy ranges at negative 3.3% for the down 200 basis points (“DN 200”) and at negative 12.0% for the up 200 basis points (“UP 200”) scenarios. As noted in the table above, the Company’s net interest income (“NII”) exposure for the down 200 basis points (“DN 200”) has surpassed our IRR policy limit as of September 30, 2008. The deterioration is largely due to limited capacity of the bank’s deposits to absorb an additional 200 basis point reduction in the target Fed Funds rate. The DN 200 scenario corresponds to an instantaneous and parallel rate shock of 200 basis points where target Fed Funds is set at 0%, which is highly unlikely. A special 100 basis point (“DN 100”) scenario NII simulation indicates margin compression mostly occurs when Fed decreases its target rate below 1%.

The simulation indicates a 7.1% improvement in the Up 200 scenario for NII over the next twelve months, using a scenario in which the Federal funds rate immediately increases 200 basis points to 4%. The improvement is mainly due to the sale of fixed rate mortgages and higher CDs balances.

The Company does not currently have any derivative instruments to assist with managing interest rate risk. The derivative instruments the Company does have are offsetting instruments between the Company and certain commercial customers and the Company and a third party. Changes in these derivative instrument’s market values are recorded in the balance sheet with no income statement impact for the Company. The associated interest income and interest expense for the derivative instruments are recorded in the Company’s income statement. The Company had $140.8 million notional amount of offsetting derivative instruments at September 30, 2008. The offsetting derivative instruments are not specifically addressed in the Company’s interest rate risk model. These derivatives have been reviewed and included in the calculation of the Company’s off-balance sheet credit risk model.

The Company is utilizing an interest rate risk mitigation program to partially offset exposure of its mortgage-backed securities portfolio to rising interest rates. The Company holds a short position on US Treasury futures, which will increase in value as rates rise and offset adverse effects of rising rates on the MBS portfolio.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

An evaluation was conducted under the supervision and with the participation of the Company’s Management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures as of September 30, 2008. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) were effective as of such date to ensure that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to Management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in internal control over financial reporting

There was no change in our internal control over financial reporting during the quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

GLOSSARY

ABS: Asset Backed Security.

AFS: Available for sale.

ALLL: Allowance for loan losses.

Asset and Liability Committee (ALCO): Oversees the decisions made by the Company’s Management to manage the risk associated with the assets and liabilities held by the Company.

Average balances: Daily averages, i.e., the averages are computed using the balances for each day of the year, rather than computing the average of the first and last day of the year.

Bps (Basis Points): A percentage expressed by multiplying a percentage by 100. For example, 1.0% is 100 basis points.

Basis risk: The risk that financial instruments have interest rates that differ in how often they change, the extent to which they change, and whether they change sooner or later than other interest rates.

Capitalized earnings: A valuation approach which utilizes expected levels of profitability to determine the value of the reporting unit. Using this approach, current earnings are divided by a capitalization rate. The capitalization rate is equal to the discount rate which is also known as the required equity rate of return, less the long-term earnings growth rate. The resulting indication of value reflects the discounted net present value of the expected future income of the reporting unit.

CD: Certificates of Deposit.

CMO: Collateralized Mortgage Obligations.

Core Bank: Consolidated financial results less the financial results from the RAL and RT Programs. Also defined as “Excluding RAL and RT”.

CPP: U.S. Treasury’s Troubled Asset Relief Capital Purchase Program. TARP gave the U.S. Treasury authority to deploy up to $700 billion into the financial system with an objective of improving liquidity in capital markets. On October 24, 2008, U.S. Treasury announced plans to direct $250 billion of this authority into preferred stock investments in banks.

Credit risk: The risk that a debtor will not repay according to the terms of the debt contract.

Economic Value of Equity (EVE): A cash flow calculation that takes the present value of all asset cash flows and subtracts the present value of all liability cash flows.

EESA: Emergency Economic Stabilization Act of 2008.

FASB: Financial Accounting Standards Board.

FBSLO: First Bank of San Luis Obispo.

FDICIA: Federal Deposit Insurance Corporation Improvement Act.

FHLB: Federal Home Loan Bank.

FNB: First National Bank of Central California.

FOMC: Federal Open Market Committee of the Federal Reserve System.

FRB: Board of Governors of the Federal Reserve System and the Federal Reserve Bank of San Francisco.

Fully tax equivalent basis (FTE): A basis of presentation of net interest income and net interest margin adjusted to consistently reflect income from taxable and tax-exempt loans and securities based on a 42.05% marginal tax rate. The yield that a tax-free investment would provide to an investor if the tax-free yield was “grossed-up” by the amount of taxes not paid.

FTE Net Interest Margin: Net interest income plus the FTE expressed as a percentage of average earning assets. It is used to measure the difference between the average rate of interest earned on assets and the average rate of interest that must be paid on liabilities used to fund those assets.

FVO: Fair value option.

GAAP: Generally Accepted Accounting Principles, which are approved principles of accounting as generally accepted in the United States of America.

Holiday loan: A loan product offered by professional tax preparers to their clients. Holiday loans are subject to the same underwriting criteria and credit review as a RAL. Holiday loans are unsecured loans but, typically pay-off with a RAL or RT product.

Interest rate risk: The risk of adverse impacts of changes in interest rates on financial instruments.

Investment grade: Investment grade is a rating of an investment security which is graded BBB- or better by Standard & Poor or Baa3 or better at Moody's.

IRS: Internal Revenue Service.

JH: Jackson Hewitt.

Market risk: The risk that the market values of assets or liabilities on which the interest rate is fixed will increase or decrease with changes in market interest rates.

MBS: Mortgage Backed Security.

MCM: Morton Capital Management.

MD&A: Management Discussion and Analysis.

Mismatch risk: The risk that interest rate changes do not occur equally in the rates of interest earned on assets and paid on liabilities. This occurs because of differences in the contractual maturity terms of the assets and liabilities held.

MMDA: Money Market Deposit Accounts (also referred to as Money Market accounts)

Net Interest Income (NII): The difference between the interest earned on the loans and securities portfolios and the interest paid on deposits and wholesale borrowings.

Net interest margin: Net interest income expressed as a percentage of average earning assets. It is used to measure the difference between the average rate of interest earned on assets and the average rate of interest that must be paid on liabilities used to fund those assets.

NOW: Interest-bearing checking accounts.

NPL: Nonperforming Loans.

OCI: Other Comprehensive Income.

PCB: Pacific Capital Bancorp.

PCBNA: Pacific Capital Bank, National Association.

PCCI: Pacific Crest Capital, Inc.

PER: Self filers of tax returns.

PRO: Other professional tax preparers.

RAL: Refund anticipation loan.

RAL Pre-file: A RAL product that is offered in advance of the taxpayer’s filing of their tax return, primarily in the month of January, for a portion of the anticipated refund amount. The loan is repaid upon a funded RAL or RT.

RAL and RT Programs: There are two products related to income tax returns filed electronically, RAL and RT. The Company provides these products to taxpayers who file their returns electronically nationwide.

Repos: Securities sold under agreements to repurchase.

REWA: R.E. Wacker Associates.

RT: Refund transfer.

RWA: Risk Weighted Assets.

Sarbanes-Oxley Act: In 2002, the Sarbanes-Oxley Act (“SOX”) was enacted as Federal legislation. This legislation imposes a number of new requirements on financial reporting and corporate governance on all corporations.

SBA: Small Business Administration.

SBB: San Benito Bank.

SBB&T: Santa Barbara Bank & Trust.

SEC: Securities and Exchange Commission.

SFAS: Statement of Financial Accounting Standard.

SVNB: South Valley National Bank.

Term Investment Option (TIO): An investment opportunity offered to participants that have treasury tax and loans with the Federal Reserve Bank.

The Company: Pacific Capital Bancorp, which is a bank holding company.

TT&L: Treasury Tax and Loans.

Weighted average rate: Total interest divided by the computed daily weighted average balance.

Wholesale borrowing: Borrowings from other financial institutions.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

Information regarding legal proceedings is incorporated by reference from Note 12, “Commitments and Contingencies” to the Consolidated Financial Statements of this quarterly report on Form 10-Q.

ITEM 1A.

RISK FACTORS

In addition to the other information set forth in this quarterly report on Form 10-Q, you should carefully consider the risk factors discussed in Item 3. Quantitative and Qualitative Disclosures About Market Risk of this Form 10-Q and in the 2007 Form 10-K, which could materially affect the Company’s business, financial condition or future results.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS


Exhibit Number		Description

31.		Certifications pursuant to Section 302 of Sarbanes-Oxley Act of 2002

		31.1 Certification of George S. Leis

		31.2 Certification of Stephen V. Masterson

32.		Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002

		32.1 Certification of George S. Leis and Stephen V. Masterson

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:

PACIFIC CAPITAL BANCORP



		/s/ George S. Leis		November 10, 2008
		George S. Leis
		President and Chief Executive Officer

		/s/ Stephen V. Masterson		November 10, 2008
		Stephen V. Masterson
		Executive Vice President and Chief Financial Officer