FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC. 20549


(Mark One)

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

For the quarterly period ended   June 30, 1998

                                       OR

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

For the transition period from __________________ to _____________________.


Commission File Number   0-13528

                             Pacific Capital Bancorp
             (Exact name of registrant as specified in its charter)

        California                                             77-0003875
(State or other jurisdiction of                             (I.R.S. Employer
 incorporation or organization)                           Identification Number)

                 1001 S. Main Street, Salinas, California 93901
                    (Address of principal executive offices)
                                   (Zip Code)

                                 (408) 757-4900
              (Registrant's telephone number, including area code)

                                       N/A
             (Former name, former address and former fiscal year, if
                           changed since last report)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

Yes  X     No
   -----     -----


                      APPLICABLE ONLY TO CORPORATE ISSUERS:

         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock, as of the latest practicable date.

                                                                 Outstanding at
         Class                                                  August 12, 1998
         -----                                                  ---------------
         Common stock, no par value                             4,504,083 Shares


This report contains a total of 25 pages.

                                      -1-

<PAGE>


                         PART I - FINANCIAL INFORMATION

ITEM 1                                                                      PAGE

PACIFIC CAPITAL BANCORP AND
SUBSIDIARIES UNAUDITED FINANCIAL STATEMENTS

         CONSOLIDATED BALANCE SHEETS                                           3

         CONSOLIDATED STATEMENTS OF INCOME                                     4

         CONSOLIDATED STATEMENTS OF CASH FLOWS                                 6

         CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                       7

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                          8-9


ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS                                       9 - 17

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK                                                                   17


                           PART II - OTHER INFORMATION

ITEM 4

SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS                         19


ITEM 6

EXHIBITS AND REPORTS ON FORM 8-K                                              20

SIGNATURES                                                                    25

                                      -2-

<PAGE>


<TABLE>
                                                               PART 1
                                                   ITEM 1 - FINANCIAL INFORMATION
                                              PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
                                                     CONSOLIDATED BALANCE SHEETS
                                                             (UNAUDITED)
                                                (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<CAPTION>
                                                                                                    June 30,           December 31,
                                                                                                        1998                   1997
                                                                                                   --------------------------------
<S>                                                                                                <C>                    <C>      
Assets

Cash and due from banks                                                                            $  51,303              $  49,982
Federal funds sold and other short term investments                                                   52,393                 28,537
                                                                                                   --------------------------------
      Total cash and equivalents                                                                     103,696                 78,519
Investment securities:
   Available-for-sale securities, at fair value                                                      226,976                220,984
   Held-to-maturity securities, at amortized cost
     (fair value of $5,667 and $7,347, respectively)                                                   5,644                  7,347

Loans held for sale                                                                                   12,971                 10,523

Total loans held for investment                                                                      438,602                419,293
   Less allowance for possible loan losses                                                            (4,544)                (4,266)
                                                                                                   --------------------------------
      Net loans                                                                                      434,058                415,027

Premises and equipment, net                                                                           15,161                 15,331
Accrued interest receivable and other, net                                                            17,054                 16,988
                                                                                                   --------------------------------

Total assets                                                                                       $ 815,560              $ 764,719
                                                                                                   ================================

Liabilities and shareholders' equity

Deposits:
   Demand, non-interest bearing                                                                    $ 168,550              $ 174,649
   Demand, interest bearing                                                                           95,309                 97,322
   Savings and money market                                                                          184,947                173,151
   Time certificates                                                                                 281,519                238,276
                                                                                                   --------------------------------
      Total deposits                                                                                 730,325                683,398

Accrued interest payable and other liabilities                                                         9,171                  8,763
                                                                                                   --------------------------------

Total liabilities                                                                                    739,496                692,161

Shareholders' equity:
Preferred stock; 20,000,000 shares authorized and unissued                                              --                     --
Common stock, no par value; 20,000,000 shares authorized;
   4,322,687 and 4,294,403 shares issued and outstanding at
   June 30, 1998  and at December 31, 1997, respectively                                              58,444                 58,434
Retained earnings                                                                                     16,769                 12,852
Accumulated other comprehensive income                                                                   851                  1,272
                                                                                                   --------------------------------

Total shareholders' equity                                                                            76,064                 72,558
                                                                                                   --------------------------------

Total liabilities and shareholders' equity                                                         $ 815,560              $ 764,719
                                                                                                   ================================

<FN>
See accompanying notes to unaudited consolidated financial statements.
</FN>
</TABLE>

                                                                -3-

<PAGE>


<TABLE>
                                              PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
                                                  CONSOLIDATED STATEMENTS OF INCOME
                                                             (UNAUDITED)
                                         (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<CAPTION>
                                                                                                  Six months              Six months
                                                                                                       ended                   ended
                                                                                               June 30, 1998           June 30, 1997
                                                                                               -------------------------------------
<S>                                                                                              <C>                     <C>        
Interest income:
   Interest and fees on loans                                                                    $    21,271             $    19,996
   Interest on fed funds sold                                                                          1,298                     732
   Interest on investment securities                                                                   6,850                   4,307
                                                                                                 -----------------------------------
     Total interest income                                                                            29,419                  25,035
                                                                                                 -----------------------------------
Interest expense:
   Interest on deposits                                                                               10,141                   7,984
   Other                                                                                                   5                      21
                                                                                                 -----------------------------------
     Total interest expense                                                                           10,146                   8,005
                                                                                                 -----------------------------------
     Net interest income                                                                              19,273                  17,030
 Provision for possible loan losses                                                                      690                     570
                                                                                                 -----------------------------------
Net interest income after provision for possible loan losses                                          18,583                  16,460
                                                                                                 -----------------------------------

Other income:
   Service charges                                                                                     1,480                   1,240
   Gain on sale of loans                                                                                  11                      11
   Net gain (loss) on securities transactions                                                            (14)                     11
   Other                                                                                                 367                     342
                                                                                                 -----------------------------------
     Total other income                                                                                1,844                   1,604
                                                                                                 -----------------------------------

Other expenses:
   Salaries and benefits                                                                               6,231                   5,443
   Occupancy                                                                                           1,201                   1,124
   Equipment                                                                                             972                     828
   Advertising and promotion                                                                             214                     343
   Stationary and supplies                                                                               295                     426
   Legal and professional fees                                                                           693                     421
   Regulatory assessments                                                                                125                     107
   Other operating                                                                                     1,267                   1,232
                                                                                                 -----------------------------------
     Total other expenses                                                                             10,998                   9,924

Earnings before income taxes                                                                           9,429                   8,140

Income taxes                                                                                           3,774                   3,217
                                                                                                 -----------------------------------

Net income                                                                                       $     5,655             $     4,923
                                                                                                 ===================================

Basic earnings per share                                                                         $      1.31             $      1.15
                                                                                                 ===================================
Diluted earnings per share                                                                       $      1.26             $      1.11
                                                                                                 ===================================

Weighted average shares outstanding                                                                4,309,558               4,294,459
Dilutive effect of stock options                                                                     183,881                 148,347
                                                                                                 -----------------------------------
Total weighted average diluted shares outstanding                                                  4,493,439               4,442,806
                                                                                                 ===================================

<FN>
See accompanying notes to unaudited consolidated financial statements.
</FN>
</TABLE>

                                                                -4-

<PAGE>


<TABLE>
                                              PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
                                                  CONSOLIDATED STATEMENTS OF INCOME
                                                             (UNAUDITED)
                                         (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<CAPTION>
                                                                                                Three months            Three months
                                                                                                       ended                   ended
                                                                                               June 30, 1998           June 30, 1997
                                                                                               -------------------------------------
<S>                                                                                              <C>                     <C>        
Interest income:
   Interest and fees on loans                                                                    $    10,902             $    10,465
   Interest on fed funds sold                                                                            663                     423
   Interest on investment securities                                                                   3,329                   2,161
                                                                                                 -----------------------------------
     Total interest income                                                                            14,894                  13,049
                                                                                                 -----------------------------------
Interest expense:
   Interest on deposits                                                                                5,177                   4,129
   Other                                                                                                   2                      14
                                                                                                 -----------------------------------
     Total interest expense                                                                            5,179                   4,143
                                                                                                 -----------------------------------
     Net interest income                                                                               9,715                   8,906
 Provision for possible loan losses                                                                      345                     285
                                                                                                 -----------------------------------
Net interest income after provision for possible loan losses                                           9,370                   8,621
                                                                                                 -----------------------------------

Other income:
   Service charges                                                                                       729                     620
   Gain on sale of loans                                                                                   6                       5
   Net gain (loss) on securities transactions                                                            (18)                     11
   Other                                                                                                 186                     163
                                                                                                 -----------------------------------
     Total other income                                                                                  903                     799
                                                                                                 -----------------------------------

Other expenses:
   Salaries and benefits                                                                               3,086                   2,696
   Occupancy                                                                                             594                     560
   Equipment                                                                                             481                     437
   Advertising and promotion                                                                             169                     191
   Stationary and supplies                                                                               135                     194
   Legal and professional fees                                                                           365                     217
   Regulatory assessments                                                                                 55                      53
   Other operating                                                                                       599                     616
                                                                                                 -----------------------------------
     Total other expenses                                                                              5,484                   4,964

Earnings before income taxes                                                                           4,789                   4,456

Income taxes                                                                                           1,926                   1,775
                                                                                                 -----------------------------------

Net income                                                                                       $     2,863             $     2,681
                                                                                                 ===================================

Basic earnings per share                                                                         $      0.66             $      0.62
                                                                                                 ===================================
Diluted earnings per share                                                                       $      0.64             $      0.60
                                                                                                 ===================================

Weighted average shares outstanding                                                                4,315,432               4,295,988
Dilutive effect of stock options                                                                     191,148                 147,939
                                                                                                 -----------------------------------
Total weighted average diluted shares outstanding                                                  4,506,580               4,443,927
                                                                                                 ===================================

<FN>
See accompanying notes to unaudited consolidated financial statements.
</FN>
</TABLE>

                                                                -5-

<PAGE>


<TABLE>
                                              PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
                                                CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                             (UNAUDITED)
                                                           (IN THOUSANDS)

<CAPTION>
                                                                                                  Six months             Six months
                                                                                                       ended                  ended
                                                                                               June 30, 1998          June 30, 1997
                                                                                               ------------------------------------
<S>                                                                                                <C>                    <C>      
Cash flows from operating activities:
Net income                                                                                         $   5,655              $   4,923
Adjustments to reconcile net income to net cash provided by
     (used in) operating activities:
   Depreciation and amortization                                                                         779                    725
   Provision for possible loan losses                                                                    690                    570
   (Gain) (loss) on sale of investment securities, net                                                    14                    (11)
   Net originations of loans available for sale                                                       (2,448)                (2,736)
   Gain on sale of loans                                                                                 (11)                   (11)
   Amortization of loan origination fees, net                                                            (95)                   (90)
   Change in accrued interest receivable and other assets                                               (487)                  (992)
   Change in accrued interest payable and other liabilities                                              419                 (3,584)
                                                                                                   --------------------------------
Net cash provided by (used in) operating activities                                                    4,516                 (1,206)
                                                                                                   --------------------------------

Investing activities:
   Net increase in loans                                                                             (19,742)               (25,481)
   Recoveries on loans                                                                                   116                    113
   Maturities of investment securities                                                                31,974                  8,516
   Purchases of investment securities                                                                (55,408)                (9,029)
   Proceeds from sale of available-for-sale securities                                                19,131                   --
   Capital expenditures, net                                                                            (609)                  (624)
                                                                                                   --------------------------------
Net cash used in investing activities                                                                (24,538)               (26,505)
                                                                                                   --------------------------------

Financing activities:
   Net increase in deposits                                                                           46,927                 60,412
   Cash paid for retirement of stock                                                                    (875)                  --
   Proceeds from exercise of options                                                                     885                    387
   Cash paid for dividends                                                                            (1,738)                (1,315)
                                                                                                   --------------------------------
Net cash provided by financing activities                                                             45,199                 59,484
                                                                                                   --------------------------------

Net increase in cash and equivalents                                                                  25,177                 31,773
Cash and equivalents at beginning of period                                                           78,519                 76,245
                                                                                                   ================================
Cash and equivalents at end of period                                                              $ 103,696              $ 108,018
                                                                                                   ================================

Supplemental disclosures of cash flow information:
    Cash paid during the period
     Interest                                                                                      $   9,996              $   8,137
     Income taxes                                                                                      2,785                  2,450

<FN>
See accompanying notes to unaudited consolidated financial statements.
</FN>
</TABLE>

                                                                -6-

<PAGE>


<TABLE>
                                              PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                                             (UNAUDITED)
                                                           (IN THOUSANDS)

<CAPTION>
                                                                                                          Six Months Ended
                                                                                                          June 30,         June 30,
                                                                                                             1998              1997
                                                                                                          -------------------------
<S>                                                                                                       <C>               <C>    
Net income                                                                                                $ 5,655           $ 4,923
Net change in unrealized gain on available-for-sale securities                                               (413)             (236)
Realized gain (loss) on sale of available-for-sale securities, net of taxes                                    (8)                7
                                                                                                          -------------------------
Total comprehensive income for the period                                                                 $ 5,234           $ 4,694
                                                                                                          =========================


                                                                                                          Three Months Ended
                                                                                                          June 30,         June 30,
                                                                                                             1998              1997
                                                                                                          -------------------------
Net income                                                                                                $ 2,863           $ 2,681
Net change in unrealized gain (loss) on available-for-sale securities                                        (372)              965
Realized gain (loss) on sale of available-for-sale securities, net of taxes                                   (11)                7
                                                                                                          -------------------------
Total comprehensive income for the period                                                                 $ 2,480           $ 3,653
                                                                                                          =========================
</TABLE>

                                                                -7-

<PAGE>


                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

Note 1 - Basis of Presentation

                  In the  opinion of the  Company,  the  unaudited  consolidated
                  financial  statements,   prepared  on  the  accrual  basis  of
                  accounting, contain all adjustments (consisting of only normal
                  recurring  adjustments)  which are necessary to present fairly
                  the financial position of the Company and subsidiaries at June
                  30, 1998 and December 31, 1997, the results of its operations,
                  statements  of cash flows,  and  comprehensive  income for the
                  periods ended June 30, 1998 and 1997.

                  Certain information and note disclosures normally presented in
                  financial  statements  prepared in accordance  with  generally
                  accepted accounting  principles have been omitted. The results
                  of  operations  for the  period  ended  June 30,  1998 are not
                  necessarily  indicative of the operating  results for the full
                  year ending December 31, 1998.

                  In June 1997, the Financial  Accounting Standards Board (FASB)
                  issued Statement of Financial  Accounting  Standard (SFAS) No.
                  131,  Disclosures  about Segments of an Enterprise and Related
                  Information.  The Statement  establishes standards for the way
                  the  public  business  enterprises  are to report  information
                  about operating  segments in annual  financial  statements and
                  requires  those  enterprises  to report  selected  information
                  about operating  segments in interim  financial reports issued
                  to shareholders.  This statement is effective for fiscal years
                  beginning  after  December  15,  1997.  The  Company  does not
                  believe it will have a significant  impact on its consolidated
                  financial statements.

                  In February  1998,  the FASB  issued SFAS No. 132,  Employers'
                  Disclosures about Pensions and Other Postretirement  Benefits.
                  This   Statement   amends  the  disclosure   requirements   of
                  Statements No. 87, Employers' Accounting for Pensions, No. 88,
                  Employers'  Accounting for  Settlements  and  Curtailments  of
                  Defined Benefit  Pension Plans and for  Termination  Benefits,
                  and No. 106, Employers' Accounting for Postretirement Benefits
                  Other  Than   Pensions.   This  Statement   standardizes   the
                  disclosure  requirements  of Statements  No. 87 and No. 106 to
                  the extent  practicable  and recommends a parallel  format for
                  presenting information about pensions and other postretirement
                  benefits.   This  Statement  is  effective  for  fiscal  years
                  beginning  after  December  15,  1997.  The  statement  is not
                  anticipated  to  have  a  material  impact  on  the  financial
                  condition or results of operations of the Company.

                  In June 1998,  the FASB issued SFAS No.  133,  Accounting  for
                  Derivative Instruments and Hedging Activities.  This Statement
                  requires that an entity  recognize all  derivatives  as either
                  assets or liabilities  in the statement of financial  position
                  and measure those  instruments at fair value. The statement is
                  effective for fiscal  quarters of fiscal years beginning after
                  June 15, 1999. The Company  expects to adopt this Statement on
                  January 1, 2000. The Company will begin  evaluating the impact
                  of  its  adoption  on  the  Company's  consolidated  financial
                  statements.

Note 2 - Consolidation

                  The consolidated  financial statements include the accounts of
                  the Company and its wholly-owned subsidiaries,  First National
                  Bank of  Central  California,  ("First  National"),  and South
                  Valley  National  Bank ("South  Valley").  For  purposes  used
                  herein,  the term "Subsidiary Banks" shall mean First National
                  and South  Valley,  collectively.  All  material  intercompany
                  accounts   and   transactions    have   been   eliminated   in
                  consolidation.

Note 3 - Loans to Directors

                  In the ordinary course of business, the Company has made loans
                  to  directors  of the Company and their  affiliates,  which at
                  June 30, 1998 amounted to approximately $8,648,000.

Note 4 - Commitments

                  The  Company  had  outstanding  standby  letters  of credit of
                  approximately $4,786,000 at June 30, 1998 .

                                      -8-

<PAGE>


Note 5 - Net Income Per Share and Dividends

                  Net income per share is computed  using the  weighted  average
                  number  of  shares  of common  and  common  equivalent  shares
                  outstanding.  On January 28 and April 28, the Company declared
                  a $0.20 per share cash dividend to  shareholders  of record on
                  March 16 and June 15,  payable on March 31 and June 30,  1998,
                  respectively.

Note 6 - Taxes

                  As of June 30,  1998,  the Company had a deferred tax asset of
                  approximately $2,399,000. The asset results primarily from the
                  provisions for possible loan losses and other income statement
                  items,  which are  recognized in the financial  statements but
                  are not yet  deductible  for  income tax  reporting  purposes.
                  Management  of the Company  believes that the net deferred tax
                  asset is fully realizable  through  sufficient  taxable income
                  within carryback periods and current year taxable income.

Note 7 - Proposed Merger

                  On July 20,  1998,  the  Company  announced  the  signing of a
                  definitive  agreement  whereby  it would  merge  with and into
                  Santa Barbara  Bancorp in a tax-free  exchange to be accounted
                  for as a  pooling-of-interests.  The  agreement  provides  for
                  shareholders  of the Company to receive 1.935 shares,  subject
                  to adjustment,  of Santa Barbara Bancorp common stock for each
                  outstanding  share of Company stock. The transaction is valued
                  at approximately $287.6 million, based on the closing price of
                  Santa Barbara  Bancorp on July 17, 1998.  The  transaction  is
                  expected to close in December of 1998.

                  Santa Barbara Bancorp,  headquartered in Santa Barbara, is the
                  holding company for Santa Barbara Bank & Trust with 26 banking
                  offices  throughout  Santa Barbara County and Western  Ventura
                  County.


                                     PART 1
               ITEM II - PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview of Changes in the Financial Statements

         Net income for the six months  ended June 30,  1998 was  $5,655,000  or
$1.26  diluted  earnings  per share  compared  to  $4,923,000  or $1.11  diluted
earnings per share during the  comparable  period in 1997.  This  represents  an
earnings  per share  increase of 13.6% over 1997.  The increase in net income is
due mainly to a $2,243,000  increase in net interest income. The increase in net
interest income is due to growth in average total earning assets of $136,945,000
or 24.0% partially offset by an increase in average interest bearing deposits of
$96,953,000 as compared to the comparable 1997 period.

         Outstanding  loans  were  $438,602,000  at June 30,  1998  compared  to
$419,293,000 at December 31, 1997, a $19,309,000 or 4.6% increase. Federal Funds
Sold and Investment Securities at June 30, 1998 were $285,013,000, a $28,145,000
or 11.0% increase from December 31, 1997. This was primarily due to the increase
in total  deposits which resulted in an increase in investments in Federal Funds
and investment securities.

         The  Company's  total  deposits  at June  30,  1998  were  $730,325,000
compared to  $683,398,000  at December 31, 1997, a $46,927,000 or 6.9% increase.
Non-interest  bearing demand deposits  decreased  $6,099,000,  interest  bearing
demand  deposits  decreased  $2,013,000,  while savings and money market deposit
accounts  increased   $11,796,000  and  certificates  of  deposit  increased  by
$43,243,000  during the first six months of 1998.  Management  believes that the
growth in deposits is a result of the overall  strength in the local tourism and
agribusiness  industries.  In  addition,  growth in  housing  demand and a small
influx of  businesses  moving into the  southern  Santa  Clara  County area have
contributed to the Company's deposit growth.

                                      -9-

<PAGE>


Loans

         Outstanding total loans averaged  $436,622,000 for the six months ended
June 30, 1998 compared to  $404,858,000  for the  comparable  period in 1997, an
increase of  $31,764,000,  or 7.9%.  This  increase in loans is due to growth in
loan demand from  qualified  borrowers  and  reflects  stability  in most of the
primary markets which the Company  serves.  The Company lends primarily to small
and  medium  sized  businesses  and  consumers  within  its  markets,  which are
comprised  principally of Monterey,  Santa Cruz, San Benito,  and southern Santa
Clara counties.

Quality of Loans

         The composition of non-performing  loans as of June 30, 1998 , December
31, 1997, and June 30, 1997 is summarized in the following table.


                              Non-performing Loans
                             (Dollars in Thousands)

                                         June  30,   December 31,      June  30,
                                             1998           1997          1997
                                           ------         ------         ------
Accruing loans past due 90 days or more:
      Commercial                           $   15         $   26         $   17
      Consumer                               --               17             32
      Real Estate                            --             --             --
                                           ------         ------         ------
Total                                      $   15         $   43         $   49

Nonaccrual loans:
      Commercial                              490          1,278            821
      Consumer                                250            106            130
      Real Estate                             200            766            831
                                           ------         ------         ------
Total                                      $  940         $2,150         $1,782

Total Non-performing
Loans                                      $  955         $2,193         $1,831
                                           ======         ======         ======
Non-performing Loans
To Total Loans                               0.22%          0.52%          0.44%
Allowance For Possible
Loan Losses To Total
Non-performing Loans                       475.81%        194.53%        222.62%


         The  Company  does  not  expect  to  sustain  losses  from  any  of the
non-performing  loans  in  excess  of  that  specifically  provided  for  in the
allowance  for  possible  loan  losses.   Currently,   the  Company's  level  of
non-performing loans to total loans is below that of peer banks.

         In addition to the above, the Company holds one Other Real Estate Owned
(OREO) property,  which totals  $1,213,000.  The amount recorded  represents the
lesser  of the loan  balance  or  current  fair  value  obtained  from a current
appraisal less  anticipated  selling costs;  therefore,  any identified loss has
already been recognized.

         Inherent in the  lending  function is the fact that loan losses will be
experienced  and that the risk of loss will vary with the type of loan  extended
and the creditworthiness of the borrower. To reflect the estimated risks of loss
associated  with  its  loan  portfolio,  additions  are  made  to the  Company's
allowance  for possible loan losses.  As an integral  part of this process,  the
allowance for possible loan losses is subject to review and possible  adjustment
as a  result  of  management's  assessment  of risk or  regulatory  examinations
conducted  by  governmental  agencies.  The  Company's  entire  allowance  is  a
valuation  allowance  created by direct charges against  operations  through the
provision for possible loan losses.

         The provision for possible loan losses  charged  against  operations is
based upon the actual net loan losses  incurred plus an amount for other factors
which, in management's judgment, deserve recognition in estimating possible loan
losses.  The Company  evaluates  the adequacy of its allowance for possible loan
losses on a quarterly basis. The Company has also contracted with an independent
loan review  consulting firm to evaluate

                                      -10-

<PAGE>


overall  credit  quality and the adequacy of the  allowance  for  possible  loan
losses. Both internal and external  evaluations take into account the following:
specific  loan   conditions  as  determined  by   management;   the   historical
relationship  between charge-offs and the level of the allowance;  the estimated
future loss in all significant loans;  known  deterioration in concentrations of
credit,  certain  classes  of  loans  or  pledged  collateral;  historical  loss
experience  based on volume and types of loans;  the results of any  independent
review  or  evaluation  of the loan  portfolio  quality  conducted  by or at the
direction  of  Company  management  or by bank  regulatory  agencies;  trends in
portfolio  volume,  maturity  and  composition;  off-balance  sheet credit risk;
volume  and  trends in  delinquencies  and  nonaccruals;  lending  policies  and
procedures including those for charge-off, collection and recovery; national and
local economic  conditions and their effects on specific local  industries;  and
the experience, ability and depth of lending management and staff. These factors
are essentially judgmental and may not be reduced to a mathematical formula.

         The Company closely monitors the local markets in which it conducts its
lending activities. The overall increase in loan demand from qualified borrowers
during  the past  year is  indicative  of the  strength  in the  local  economic
climate.

<TABLE>
         The table  set forth  below  summarizes  the  actual  loan  losses  and
provision  for possible  losses as of and for the periods  ended June 30, 1998 ,
December 31, 1997, and June 30, 1997:

                                                  Loan Charge-Off/Recovery Activity
                                                       (Dollars in Thousands)

<CAPTION>
                                                                           Six months                Year                Six months
                                                                              Ended                  Ended                 Ended
                                                                          June 30, 1998         December 31,1997       June 30, 1997
                                                                             --------               --------               --------
<S>                                                                          <C>                    <C>                    <C>     
Loans Outstanding, at period end                                             $438,602               $419,293               $414,018

Average Loans                                                                $436,622               $411,546               $404,858

Allowance Balance:
   Beginning Of Period                                                          4,266                  3,672                  3,672

     Charge-Offs By Loan Category:
         Commercial                                                               421                    873                     91
         Consumer                                                                 106                     59                     24
         Real Estate                                                             --                      211                    166
                                                                             --------               --------               --------
         Total                                                               $    527               $  1,143               $    281
                                                                             --------               --------               --------

     Recoveries By Loan Category:
         Commercial                                                                62                    120                     90
         Consumer                                                                  45                     24                     17
         Real Estate                                                                8                     73                      6
                                                                             --------               --------               --------
         Total                                                               $    115               $    217               $    113
                                                                             --------               --------               --------

   Net Charge-Offs                                                           $    412               $    926               $    168
                                                                             --------               --------               --------

   Provision Charged
   To Expense                                                                $    690               $  1,520               $    570

Allowance Balance
   End Of Period                                                             $  4,544               $  4,266               $  4,074
                                                                             ========               ========               ========

Allowance For Possible
Loan Losses
To Period End Loans                                                              1.04%                  1.02%                  0.98%

Annualized Net Charge-offs
to Average Loans                                                                 0.19                   0.23%                  0.05%
</TABLE>

                                                                -11-

<PAGE>


         The  provision  for possible loan losses  charged  against  earnings is
based upon an analysis of the actual migration of loans to losses plus an amount
for other factors  which,  in  management's  judgment,  deserve  recognition  in
estimating  possible  loan losses.  While these  factors  cannot be reduced to a
mathematical  formula,  it is management's  view that the allowance for possible
loan losses of  $4,544,000  or 1.04% of total loans was  adequate as of June 30,
1998.

Results of Operations


                         Six months ended June 30, 1998
                                  Compared with
                         Six months ended June 30, 1997

         Net income for the six months  ended June 30, 1998 was  $5,655,000,  an
increase of $732,000 or 14.9% as compared to the same 1997 period.  The increase
in net income for the period was due  primarily  to an increase in net  interest
income of $2,243,000  partially offset by an increase in non-interest expense of
$1,074,000.  The  increase  in net  interest  income is due to growth in average
total earning assets of $136,945,000  partially offset by an increase in average
interest bearing deposits of $96,953,000 compared to the same 1997 period.

         The average  balance of interest  earning  assets during the six months
ended June 30, 1998 was $708,650,000,  a 24.0% increase over the comparable 1997
period.  The Company's  average yield on earning assets for the six months ended
June 30, 1998 decreased to 8.4% from 8.8% in the comparable  1997 period.  Total
interest income increased  $4,384,000 or 17.5% for the six months ended June 30,
1998  compared to the same 1997 period due to the  increase in average  interest
earning assets.

         Average deposits for the Company for the six months ended June 30, 1998
was  $690,204,000,  a $125,696,000 or 22.3% increase compared to the same period
ended June 30,  1997.  The  Company's  average  cost of funds for the six months
ended June 30, 1998 was 3.8% which yielded a net interest  margin of 5.5%.  This
compares to an average cost of funds of 3.7% and a net  interest  margin of 6.0%
for the comparable  1997 period.  Interest  expense of  $10,146,000  for the six
months  ended June 30, 1998 was  $2,141,000  or 26.8% over the  comparable  1997
period due to an increase in average  interest  bearing  deposits of $96,953,000
and an increase in the Company's cost of funds of 0.1%. Net interest  income for
the six months ended June 30, 1998 increased $2,243,000 or 13.2%.

         The Company made a provision to the  allowance for possible loan losses
of $690,000 in the six months ended June 30, 1998  primarily  due to the overall
growth experienced within the loan portfolio.  An analysis of the loan portfolio
completed by the Company indicates that the current allowance for loan losses is
adequate based on the Company's calculated provision requirements.

         Total loans charged-off net of recoveries for the six months ended June
30, 1998 amounted to $412,000  compared to $168,000 for the same period in 1997.
Annualized  net loan  charge-offs  as a percentage  of average loans for the six
months ended June 30, 1998 was 0.19%  compared to 0.05% for the six months ended
June 30, 1997 and 0.23% for the year ended December 31, 1997.

         Total other  income was  $1,844,000  for the six months  ended June 30,
1998, a $240,000 or 15.0% increase compared to the same period in 1997.  Service
charges on deposit  accounts  increased by $240,000 or 19.4% over the comparable
period in 1997.  The net gain (loss) on  securities  transactions  decreased  by
$25,000  offset by other income which  increased by $25,000  compared to the six
months ended June 30, 1997.

         Salaries  and  benefits  expense for the six months ended June 30, 1998
was  $6,231,000,  a $788,000 or 14.5% increase over the comparable  1997 period.
This variance resulted  primarily from an increase in overall staffing levels to
accommodate  internal growth as well as regular salary increases and an increase
in the accrual for salary continuation plans. The Company employed 288 full time
equivalent  employees  at June 30,  1998  compared  to 285 full time  equivalent
employees  at December 31, 1997 and 259 full time  equivalent  employees at June
30, 1997.

         Total other  expenses,  excluding  salaries and  benefits,  for the six
months ended June 30, 1998, was $4,767,000, a $286,000 or 6.4% increase from the
comparable 1997 period. This was primarily due to increases in equipment expense
of  $144,000,  and an increase in legal and  professional  expense of  $272,000.
These increases were partially offset by a decrease in advertising and promotion
expense of $129,000 and a decrease in stationery expense of $131,000.

                                      -12-

<PAGE>


         Applicable income taxes of $3,774,000 for the six months ended June 30,
1998 were $557,000, or 17.3% more than the comparable 1997 period. The Company's
effective tax rate for the six months ended June 30, 1998 was 40.0%  compared to
39.5% for the same period in 1997.


<TABLE>
         Certain information concerning the Company's average balances,  yields,
and rates on average interest-earning assets and interest-bearing liabilities is
set forth in the following table. Interest yields and amounts earned include net
loan fees of $527,000 and $732,000 in 1998 and 1997, respectively.


<CAPTION>
                                                       AVERAGE BALANCE SHEETS
------------------------------------------------------------------------------------------------------------------------------------
                                                                           1998                                     1997
                                                    Average         Yield/      Interest      Average        Yield/         Interest
(Dollars in thousands)                              Balance         Rate         Amount       Balance         Rate           Amount
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>              <C>         <C>          <C>             <C>           <C>     
Assets
Earning assets:
 Investment securities:
  Taxable                                           $209,882         6.3%        $  6,525     $125,594        6.4%          $  3,994
  Non-taxable                                         13,887         4.7%             324       13,286        5.0%               327
  Federal funds sold                                  48,259         5.4%           1,298       27,967        5.3%               732
------------------------------------------------------------------------------------------------------------------------------------
Total investment securities                          272,028         6.0%           8,147      166,847        6.1%             5,053

Loans                                                436,622         9.8%          21,272      404,858       10.0%            19,982
------------------------------------------------------------------------------------------------------------------------------------

Total earning assets                                 708,650         8.4%          29,419      571,705        8.8%            25,035
Non-earning assets:
  Premises and equipment                              15,307                                    15,393
  Other                                               48,884                                    46,948
------------------------------------------------------------------------------------------------------------------------------------
Total non-earning assets                              64,191                                    62,341
------------------------------------------------------------------------------------------------------------------------------------

Total assets                                        $772,841                                   $634,046
====================================================================================================================================

Liabilities and Shareholders' Equity
 Interest-bearing deposits:
  Demand                                            $ 91,676         1.1%         $    509     $ 82,512       1.1%          $    446
  Savings and money market                           180,212         2.8%            2,504      162,921       2.8%             2,270
  Time certificates                                  266,958         5.4%            7,128      196,460       5.4%             5,268
  Other interest-bearing liabilities                     265         3.8%                5          621       6.8%                21
------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities                   539,111         3.8%           10,146      442,514       3.7%             8,005
Non interest-bearing deposits
And other liabilities:
  Demand, non interest-bearing                       151,358                                    122,615
  Other liabilities                                    7,169                                      3,200
  Shareholder's equity                                75,203                                     65,717
------------------------------------------------------------------------------------------------------------------------------------

Total other liabilities                              233,730                                    191,532
------------------------------------------------------------------------------------------------------------------------------------

TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY                                $772,841                                    $634,046
====================================================================================================================================

NET INTEREST INCOME                                                               $ 19,273                                  $ 17,030
NET INTEREST MARGIN                                                  5.5%                                     6.0%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


The net interest margin is expressed as the percentage of net interest income to
average  total  earning  assets.  The average  balance on  non-accrual  loans is
immaterial as a percentage of total loans and as such has been included in total
loans.  Non-taxable  securities  and leases  have not been  calculated  on a tax
equivalent basis.

Results of Operations


                        Three months ended June 30, 1998
                                  Compared with
                        Three months ended June 30, 1997

         Net income for the three months ended June 30, 1998 was $2,863,000,  an
increase of $182,000 or 6.8% as compared to the same 1997  period.  The increase
in net income for the period was due  primarily  to an increase in net  interest
income of $809,000  partially  offset by an increase in non-interest  expense of
$520,000.  The increase in net interest income is due to growth in average total
earning  assets of  $131,849,000  or 22.4%

                                      -13-

<PAGE>


partially  offset  by an  increase  in  average  interest  bearing  deposits  of
$97,133,000 or 21.6% compared to the same 1997 period.

         The average balance of interest  earning assets during the three months
ended June 30, 1998 was $719,452,000,  a 22.4% increase over the comparable 1997
period. The Company's average yield on earning assets for the three months ended
June 30, 1998 decreased to 8.3% from 8.9% in the comparable  1997 period.  Total
interest  income  increased  $1,845,000 or 14.1% for the three months ended June
30,  1998  compared  to the same 1997  period  due to the  increase  in  average
interest earning assets.

         Average  deposits  for the Company for the three  months ended June 30,
1998 was  $701,577,000,  a $121,580,000  or 21.0% increase  compared to the same
period ended June 30, 1997.  The  Company's  average cost of funds for the three
months ended June 30, 1998 was 3.8% which yielded a net interest margin of 5.4%.
This  compares to an average cost of funds of 3.7% and a net interest  margin of
6.1% for the  comparable  1997 period.  Interest  expense of $5,179,000  for the
three months  ended June 30, 1998 was  $1,036,000  or 25.0% over the  comparable
1997  period  due  to an  increase  in  average  interest  bearing  deposits  of
$97,133,000 and an increase in the Company's cost of funds of 0.1%. Net interest
income for the three months ended June 30, 1998 increased $809,000 or 9.1%.

         The Company made a provision to the  allowance for possible loan losses
of $345,000 in the three months ended June 30, 1998 primarily due to the overall
growth experienced within the loan portfolio.  An analysis of the loan portfolio
completed by the Company indicates that the current allowance for loan losses is
adequate based on the Company's calculated provision requirements.

         Total other  income was  $903,000  for the three  months ended June 30,
1998, a $104,000 or 13.0% increase compared to the same period in 1997.  Service
charges on deposit  accounts  increased by $109,000 or 17.6% over the comparable
period in 1997.  Net gains  (losses) on  securities  transactions  decreased  by
$29,000 partially offset by other income which increased $23,000 compared to the
same 1997 period.

         Salaries and benefits  expense for the three months ended June 30, 1998
was  $3,086,000,  a $390,000 or 14.5% increase over the comparable  1997 period.
This variance resulted  primarily from an increase in overall staffing levels to
accommodate  internal growth as well as regular salary increases and an increase
in the accrual for salary continuation plans.

         Total other expenses,  excluding  salaries and benefits,  for the three
months ended June 30, 1998 , was  $2,398,000,  a $130,000 or 5.7%  increase from
the comparable  1997 period.  This was primarily due to an increase in legal and
professional  expense of  $148,000.  This  increase  was  partially  offset by a
decrease in stationery expense of $59,000 and a decrease in advertising  expense
of $22,000.

         Applicable  income taxes of $1,926,000  for the three months ended June
30,  1998 were  $151,000,  or 8.5% more than the  comparable  1997  period.  The
Company's  effective tax rate for the three months ended June 30, 1998 was 40.2%
compared to 39.8% for the same period in 1997.

                                      -14-

<PAGE>


<TABLE>
         Certain information concerning the Company's average balances,  yields,
and rates on average interest-earning assets and interest-bearing liabilities is
set forth in the following table. Interest yields and amounts earned include net
loan fees of $306,000 and $425,000 in 1998 and 1997, respectively.

<CAPTION>
                                                       AVERAGE BALANCE SHEETS
------------------------------------------------------------------------------------------------------------------------------------
                                                                       1998                                   1997
                                                     Average      Yield/     Interest     Average       Yield/       Interest
(Dollars in thousands)                               Balance       Rate       Amount      Balance        Rate         Amount
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>             <C>       <C>        <C>               <C>         <C>   
Assets
Earning assets:
 Investment securities:
  Taxable                                              $213,455        6.0%      $3,170     $126,505          6.4%        $2,012
  Non-taxable                                            13,647        4.6%         158       13,236          4.9%           162
  Federal funds sold                                     49,170        5.4%         663       31,886          5.3%           423
------------------------------------------------------------------------------------------------------------------------------------
Total investment securities                             276,273        5.8%       3,991      170,627          6.1%         2,597

Loans                                                   443,179        9.9%      10,903      416,976         10.1%        10,452
------------------------------------------------------------------------------------------------------------------------------------

Total earning assets                                    719,452        8.3%      14,894      587,603          8.9%        13,049
Non-earning assets:
  Premises and equipment                                 15,274                               15,366
  Other                                                  50,448                               47,323
------------------------------------------------------------------------------------------------------------------------------------

Total non-earning assets                                 65,722                               62,689
------------------------------------------------------------------------------------------------------------------------------------

Total assets                                           $785,175                             $650,292
====================================================================================================================================

Liabilities and Shareholders' Equity
 Interest-bearing deposits:
  Demand                                                $91,790        1.4%        $322      $83,107          1.1%          $226
  Savings and money market                              182,833        2.7%       1,214      162,955          2.8%         1,143
  Time certificates                                     272,984        5.4%       3,641      204,412          5.4%         2,760
  Other interest-bearing liabilities                        268        3.0%           2        1,064          5.3%            14
------------------------------------------------------------------------------------------------------------------------------------

Total interest-bearing liabilities                      547,875        3.8%       5,179      451,538          3.7%         4,143
Non interest-bearing deposits
And other liabilities:
  Demand, non interest-bearing                          153,970                              129,523
  Other liabilities                                       7,431                                2,993
  Shareholder's equity                                   75,898                               66,238
------------------------------------------------------------------------------------------------------------------------------------

Total other liabilities                                 237,300                              198,754
------------------------------------------------------------------------------------------------------------------------------------

TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY                                   $785,175                             $650,292
====================================================================================================================================

NET INTEREST INCOME                                                              $9,715                                   $8,906
NET INTEREST MARGIN                                                    5.4%                                   6.1%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


The net interest margin is expressed as the percentage of net interest income to
average  total  earning  assets.  The average  balance on  non-accrual  loans is
immaterial as a percentage of total loans and as such has been included in total
loans.  Non-taxable  securities  and leases  have not been  calculated  on a tax
equivalent basis.

Year 2000

         During  1997,  the Company  began the  implementation  of its Year 2000
Plan. The Company is utilizing both internal and external resources to identify,
correct or  reprogram  and test the systems for year 2000  readiness.  Since the
Company  does  not  utilize  any   proprietary   software,   there  will  be  no
reprogramming  costs for any systems that would be deemed critical.  The Company
uses third party software to run and operate all mainframe  applications and the
testing of those systems has been performed and the Company is in the process of
verifying  all  results of that  testing.  Based on data  received  so far,  the
Company anticipates spending  approximately  $250,000 over the remainder of 1998
and 1999 to modify and test its systems.

         The Company is  currently in the process of  developing  a  Contingency
Plan as required by the Federal Financial  Institutions  Examination  Council in
case of any failure of any critical  system.  It is  anticipated  that this Plan
will be completed prior to September 1, 1998.

                                      -15-

<PAGE>


Liquidity Management

         Liquidity   represents   the   ability  of  the  Company  to  meet  the
requirements  of customer  borrowing  needs as well as  fluctuations  in deposit
flows.

         The Company manages its liquidity primarily by maintaining  investments
in  overnight  fed  funds,   money  market   mutual  funds,   available-for-sale
securities, and by maintaining lines of credit with correspondent banks. At June
30,  1998,  the total of cash and due from  banks,  overnight  fed funds,  money
market mutual funds, and available-for-sale  securities represented $330,672,000
or 45.3% of total deposits  compared to  $299,503,000 or 43.8% at year end 1997.
This  increase in liquid  assets for the six months ended June 30, 1998 resulted
primarily from an increase in deposits which were invested in fed funds sold and
short term investments.

         In the opinion of management,  there are  sufficient  resources to meet
the liquidity needs of the Company at present and projected future levels.

Capital Resources

         Capital  management  is a  continuous  process  of  providing  adequate
capital for current needs and  anticipated  future  growth.  Capital serves as a
source of funds for the  acquisition  of fixed and  other  assets  and  protects
depositors against potential losses. As the Company's assets increase, so do its
capital requirements.

         The Company  and the  Subsidiary  Banks are subject to Federal  Reserve
Board   guidelines  and   regulations   of  the   Comptroller  of  the  Currency
("Comptroller"),  respectively,  governing capital adequacy. The Federal Reserve
Board has established final risk-based and leverage capital  guidelines for bank
holding  companies which are the same as the Comptroller's  capital  regulations
for national banks.

         The Federal Reserve Board capital guidelines for bank holding companies
and  the  Comptroller's   regulations  for  national  banks  set  total  capital
requirements and define capital in terms of "core capital elements"  (comprising
Tier 1 capital) and "supplemental capital elements" (comprising Tier 2 capital).
Tier 1 capital is generally defined as the sum of the core capital elements less
goodwill.  The  following  items are defined as core  capital  elements:  common
shareholders' equity,  qualifying  noncumulative  perpetual preferred stock, and
minority  interests  in  the  equity  accounts  of  consolidated   subsidiaries.
Supplementary  capital  elements  include:  allowance  for loan and lease losses
(which cannot exceed 1.25% of an institution's risk weighted assets),  perpetual
preferred stock not qualifying as core capital,  hybrid capital  instruments and
mandatory   convertible  debt  instruments,   and  term  subordinated  debt  and
intermediate-term  preferred stock.  The maximum amount of supplemental  capital
elements which qualifies as Tier 2 capital is limited to 100% of Tier 1 capital,
net of goodwill.

         Risk-based   capital   ratios  are   calculated   with   reference   to
risk-weighted assets,  including both on and off-balance sheet exposures,  which
are multiplied by certain risk weights  assigned by the Federal Reserve Board to
those assets.  Both bank holding  companies  and national  banks are required to
maintain a minimum ratio of qualifying total capital to risk-weighted  assets of
8%, at least one-half of which must be in the form of Tier 1 capital.  There are
presently  four  risk-weight   categories:   0%  for  cash  and  unconditionally
guaranteed government  securities;  20% for conditionally  guaranteed government
securities;  50% for performing  residential  real estate loans secured by first
liens; and 100% for commercial loans.

         The Federal Reserve Board and the Comptroller  also have  established a
minimum  leverage  ratio of 3% Tier I capital to total  assets for bank  holding
companies and national banks that have received the highest composite regulatory
rating and are not  anticipating or experiencing  any  significant  growth.  All
other institutions will be required to maintain a leverage ratio of at least 100
to 200 basis points above the 3% minimum.

                                      -16-

<PAGE>


<TABLE>
         The  following  tables show the  Company's  and the  Subsidiary  Banks'
risk-based  and  leverage  capital  ratios as of June 30,  1998.  The  Company's
capital ratios  significantly  exceeded the minimum  capital levels  required by
current federal regulations.  Management believes that the Company will continue
to meet the respective minimum capital requirements in the foreseeable future.


<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Risk Based Capital Ratio
As of June 30, 1998
------------------------------------------------------------------------------------------------------------------------------------
                                                     Company                South Valley              First National
(Dollars in thousands)                         Amount        Ratio        Amount         Ratio        Amount        Ratio
-------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>           <C>          <C>            <C>          <C>           <C>   
Tier 1 capital                               $ 72,980       13.35%      $ 17,169        10.66%      $ 45,590       12.19%
Tier 1 capital minimum
   requirement                                 21,862        4.00%         6,441         4.00%        14,960        4.00%
-------------------------------------------------------------------------------------------------------------------------
      Excess                                   51,118        9.35%        10,728         7.50%        30,630        8.19%
=========================================================================================================================
Total capital                                  77,523       14.18%        18,823        11.69%        48,453       12.96%
Total capital minimum
    requirement                                43,725        8.00%        12,882         8.00%        29,920        8.00%
-------------------------------------------------------------------------------------------------------------------------
      Excess                                   33,798        6.18%         5,941         3.69%        18,533        4.96%
-------------------------------------------------------------------------------------------------------------------------
Risk-adjusted assets                         $546,557                   $161,028                    $374,001
=========================================================================================================================


------------------------------------------------------------------------------------------------------------------------------------
Leverage Capital Ratio
As of June 30, 1998
------------------------------------------------------------------------------------------------------------------------------------
                                                     Company                South Valley              First National
(Dollars in thousands)                        Amount        Ratio         Amount          Ratio       Amount       Ratio
-------------------------------------------------------------------------------------------------------------------------
Tier 1 capital to quarterly average
    total assets (leverage ratio)            $72,980        9.32%        $17,169          7.60%      $45,590       8.36%
Minimum leverage requirement               23,488 to     3.00% to       6,778 to       3.00% to    16,369 to    3.00% to
                                              39,147        5.00%         11,296          5.00%       27,281       5.00%
-------------------------------------------------------------------------------------------------------------------------
      Excess                               33,833 to     4.32% to       5,873 to       2.60% to    18,309 to    3.36% to
                                              49,492        6.32%         10,391          4.60%       29,221       5.36%
=========================================================================================================================
Total quarterly average assets              $782,941                    $225,926                    $545,628
=========================================================================================================================
</TABLE>


         Federal banking laws impose  restrictions  upon the amount of dividends
the  Subsidiary  Banks may  declare to the  Company.  Federal  laws also  impose
restrictions  upon the amount of loans or advances that the Subsidiary Banks may
extend to the Company. In management's opinion,  these do not affect the ability
of the Company to meet its cash obligations.

ITEM 3

Quantitative and Qualitative Disclosures about Market Risk

The Company's  success is largely  dependent upon its ability to manage interest
rate risk.  Interest  rate risk can be defined as the exposure of the  Company's
net interest income to adverse movements in interest rates. Although the Company
manages other risks,  as in credit and  liquidity  risk, in the normal course of
its business, management considers interest rate risk to be its most significant
market  risk and  could  potentially  have the  largest  material  effect on the
Company's  financial  condition.  The primary  objective of the  asset/liability
management  process is to measure the effect of changing  interest  rates on net
interest  income and market value and adjust the balance sheet (if necessary) to
minimize the inherent risk and maximize income. The Company's exposure to market
risk  and   interest   rate  risk  is  reviewed  on  a  regular   basis  by  the
Asset/Liability  Committee.  Tools used by  management  include a  modified  GAP
report and an  asset/liability  simulation model.  Management  believes that the
Company's  market risk and interest  rate risk  profiles  are within  reasonable
tolerances at this time. No  significant  changes to the market risk or interest
rate risk of the Company have occurred since December 31, 1997

                                      -17-

<PAGE>


         A derivative financial instrument includes futures,  forward contracts,
interest rate swaps,  option  contracts,  and other financial  instruments  with
similar  characteristics.  The Company  currently  does not enter into  futures,
forwards,  swaps,  or  options.  The  Company  is  however,  party to  financial
instruments with off-balance sheet risk in the normal course of business to meet
the financing needs of its customers.  These instruments  include commitments to
extend  credit  and  standby  letters of credit.  These  instruments  involve to
varying  degrees,  elements  of credit and  interest  rate risk in excess of the
amount  recognized in the  consolidated  statement of condition.  Commitments to
extend  credit  are  agreements  to lend to a  customer  as long as  there is no
violation of any condition  established in the contract.  Commitments  generally
have fixed  expiration  dates and may require  collateral  from the  borrower if
deemed  necessary  by the  Company.  Standby  letters of credit are  conditional
commitments  issued by the  Subsidiary  Banks to guarantee the  performance of a
customer to a third party up to a stipulated amount and with specified terms and
conditions.  Commitments to extend credit and standby  letters of credit are not
recorded on the Company's  consolidated  balance  sheet until the  instrument is
exercised.

                                      -18-

<PAGE>


PART II -- OTHER INFORMATION

ITEM 4.  Submission of Matters to a Vote of Security Holders

                  (a) The Company's  Annual Meeting of Shareholders  was held on
May 19, 1998.

                  (b) At the Annual Meeting the shareholders voted to:

                       (i) Elect Directors of the Company;


                                                Votes Cast for            Votes
                                                   Election             Withheld
                                                --------------------------------
Charles E. Bancroft                                3,374,265             18,193
Gene DiCicco                                       3,375,031             17,427
Lewis L. Fenton                                    3,375,031             17,427
Gerald T. Fry                                      3,375,031             17,427
Eugene R. Guglielmo                                3,372,834             19,624
James L. Gattis                                    3,375,031             17,424
Stanley R. Haynes                                  3,374,716             17,427
D. Vernon Horton                                   3,372,834             19,624
Hubert W. Hudson                                   3,375,716             17,742
William J. Keller                                  3,375,031             17,427
Roger C. Knopf                                     3,360,873             31,585
Clayton C. Larson                                  3,372,834             19,624
William S. McAfee                                  3,368,573             23,885
William H. Pope                                    3,373,825             18,633
Mary Lou Rawitser                                  3,359,667             32,791
William K. Sambrailo                               3,373,510             18,948
Robert B. Sheppard                                 3,373,825             18,633


                       In the voting for  Directors,  there were no  abstentions
                       and 955,244 broker nonvotes

                  (c)  Ratify  the  appointment  of  KPMG  Peat  Marwick  LLP as
independent public accountants for the 1998 fiscal year;

For                           3,348,166
Against                          10,935
Abstain                          33,356
Broker nonvotes                 955,244

                                      -19-

<PAGE>


ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

         (a) INDEX TO EXHIBITS

Exhibit                                                             Sequentially
Number                       Exhibit                               Numbered Page
------                       -------                               -------------
  3.1     Articles of incorporation of the Company as amended   1/      (*)

  3.2     Bylaws of Company as amended  2/                              (*)

 10.1     Lease -- 601 Abrego Street, Monterey, Premises  3/            (*)

 10.2     Lease for 1001 South Main Street, Salinas, Banking office 2/  (*)

 10.3     Lease dated December 15, 1988 by and between the Bank         (*)
          and James L. Gattis for 307 Main Street, Salinas Old
          Town Office. 2/

 10.4     Lease dated May 1, 1985 by and between the Bank               (*)
          and Pacific Capital Bancorp. 4/

 10.5     Pacific Capital Bancorp Employee Stock Ownership              (*)
          Plan and Trust Agreement. 5/

 10.6     Master Equipment Lease Agreement between Bank and             (*)
          Parker North American Corporation. 5/

 10.7     Lease dated September 22, 1986 between                        (*)
          Bank and The Saunders Company.  5/


*/       Not Applicable.

------------------------
1/ Filed as Exhibits 3.1, 10.21 and 10.32, respectively, to the Company's Annual
Report on Form 10-K (File No.  0-13528)  for the fiscal year ended  December 31,
1988, and are incorporated herein by reference.

2/ Filed as Exhibits 3.2 and 10.17, respectively, to the Company's Annual Report
on Form 10-K (File No.  2-87513)  for the fiscal year ended  December  31, 1984,
which are incorporated by reference.

3/ Filed  as  Exhibit  to the  Company's  Registration  Statement  on Form  S-18
(Registration No. 2-87513), which is incorporated by reference.

4/ Filed as Exhibit 10.20 to the Company's  Annual Report on Form 10-K (File No.
0-13528) for the fiscal year ended December 31, 1985,  which is  incorporated by
reference.

5/ Filed as Exhibits  10.24 through  10.26,  respectively,  to Company's  Annual
Report on Form 10-K (File No.  0-13528)  for the fiscal year ended  December 31,
1986, which are incorporated by reference.

                                      -20-

<PAGE>


Exhibit                                                             Sequentially
Number                       Exhibit                               Numbered Page
------                       -------                               -------------
 10.9     Lease dated January 24, 1989 by and between First             (*)
          National Bank of Monterey County and Stanley R.
          Haynes. 6/

 10.13    Amendment No. One to Pacific Capital Bancorp                  (*)
          Employee Stock Ownership Plan. 2/

 10.14    Amendment No. Two to Pacific Capital Bancorp                  (*)
          Employee Stock Ownership Plan. 7/

 10.15    Amendment No. Three to Pacific Capital Bancorp                (*)
          Employee Stock Ownership Plan. 7/

 10.16    Lease dated August 10, 1990 by and between the                (*)
          Trustees of the Stanley Family Trust and Pacific
          Capital Bancorp for Carmel Office. 7/

 10.17    Assignment of Lease dated November 1, 1990 by and             (*)
          between Pacific Capital Bancorp and First National
          Bank of Monterey-County for Carmel Office. 7/

 10.18    Lease dated November 12, 1990 by and between                  (*)
          First National Bank of Monterey County and Carmel
          Monterey Travel for Premises located at 601 Abrego
          Street, Monterey, California. 7/

 10.19    Prunetree Shopping Center Lease dated June 28, 1988           (*)
          by and between Dennis R. Keith and Pajaro Valley
          Bancorporation. 7/


------------------------

6/ Filed as Exhibits 10.20 through 10.24, respectively,  to the Company's Annual
Report on Form 10-K (File No.  0-13528)  for the fiscal year ended  December 31,
1989, which are incorporated by reference.

7/ Filed as Exhibits 10.25 through 10.32 to the Company's  Annual Report on Form
10-K (File No.  0-13528) for the fiscal year ended December 31, 1990,  which are
incorporated by reference.

                                      -21-

<PAGE>


Exhibit                                                             Sequentially
Number                       Exhibit                               Numbered Page
------                       -------                               -------------
 10.20    Lease dated June 21, 1990 by and between Saucito              (*)
          Land Co. and First National Bank of Monterey County. 7/

 10.22    Amendment No. Four to Pacific Capital Bancorp                 (*)
          Employee Stock Ownership Plan. 8/

 10.23    Amendment dated May 20, 1991 to Lease dated                   (*)
          December 15, 1988 by and between the Bank and
          James L. Gattis for 307 Main Street, Salinas Old
          Town Office. 8/

 10.24    Pacific Capital Bancorp Directors' Stock Option Plan          (*)
          and Form of Stock Option Agreement. 8/

 10.26    Pacific Capital Bancorp 1984 Stock Option Plan                (*)
          and Forms of Agreements as amended to date.  8/

 10.30    Business Recovery Services Agreement dated September          (*)
          30, 1991 by and between Bank and J.D.B. &
          Associates, Inc. 8/

 10.31    Consolidated Agreement dated December 17, 1991                (*)
          by and between Bank and Unisys with Equipment Sale
          Agreement, Software License Agreement and Product
          License Agreement by and between Bank and Information
          Technology, Inc. 8/

 10.32    Fidelity and Deposit Company of Maryland Directors and        (*)
          Officers Liability Insurance Policy including Bank 
          Reimbursement. 8/

 10.33    Fidelity and Deposit Company of Maryland                      (*)
          Financial Institution Bond.  8/

 10.34    Lease dated January 28, 1993 by and between J.W. and R.W.     (*)
          McClellan, Partners, and First National Bank of Central
          California. 9/

 10.35    Exercise of Lease Option as of September 19, 1992 by          (*)
          and between First National Bank of Central California
          and James L. Gattis. 9/


------------------------

8/ Filed as Exhibits 10.34 through 10.35 to the Company's  Annual Report on Form
10-K (File No.  0-13528) for the fiscal year ended December 31, 1991,  which are
incorporated by reference.

9/ Filed as  exhibits  to the  Company's  Annual  Report on Form 10-K  (File No.
0-13528) for the fiscal year ended December 31, 1993,  which are incorporated by
reference.

                                      -22-

<PAGE>


Exhibit                                                             Sequentially
Number                       Exhibit                               Numbered Page
------                       -------                               -------------
 10.37    Lease dated  November 18, 1993 by and between Hazel           (*)
          Graven and Vines Stewart and First National Bank
          of Central California. 10/

 10.38    Software License Agreement for Platform Transfer Module       (*)
          and Interface dated September 15, 1993 by and between
          First National Bank of Central California and Information
          Technology, Inc. 10/

 10.39    Equipment Sale Agreement dated December 16, 1993 by and       (*)
          between First National Bank of Central California and
          Information Technology, Inc. 10/

 10.42    Consolidated Agreement for the purchase of computer hardware  (*)
          dated December 20, 1993 by and between First National Bank
          of Central California and Unisys Corporation. 10/

 10.46    Amended Pacific Capital Bancorp 1994 Stock Option Plan        (*)
          and Form of Incentive and Non-Qualified Stock Option
          Agreements. 9/

 10.47    Amendment No. Five to Pacific Capital Bancorp Employee        (*)
          Stock Ownership Plan and Trust. 10/

 10.48    Pacific Capital Bancorp 401(k) Profit Sharing Plan. 10/       (*)

 10.49    Equipment Sale Agreement dated March 22, 1995, by and         (*)
          between First National Bank of Central California and
          Information Technology, Inc. 11/

 10.50    Equipment Sale Agreement dated February 2, 1996, by and       (*)
          between First National Bank of Central California and
          Information Technology, Inc. 11/

 10.52    Employee Welfare Benefit Plan Agreement dated January         (*)
          1, 1995, between Pacific Capital Bancorp and
          Great-West Life & Annuity Insurance Co. 11/

 10.53    Lease Agreement dated October 29, 1996 by and between         (*)
          James L. Gattis and Pacific Capital Bancorp for property
          located at 517 S. Main Street, Salinas  /12


------------------------

9/ Filed as Exhibits to the Company's  Registration  Statement on Form S-8 (File
No.  33-83848) as filed on September 8, 1994, and Amendment No. 1 to Form S-8 as
filed on November 15, 1994.

10/ Filed as  exhibits  to the  Company's  Annual  Report on Form 10-K (File No.
0-13528) for the fiscal year ended December 31, 1994,  which are incorporated by
reference.

11/ Filed as  exhibits  to the  Company's  Annual  Report on Form 10-K (File No.
0-13528) for the fiscal year ended December 31, 1995,  which are incorporated by
reference.

                                      -23-

<PAGE>


Exhibit                                                             Sequentially
Number                       Exhibit                               Numbered Page
------                       -------                               -------------
 10.57    Employment Agreement dated November 20, 1996 between South    (*)
          Valley National Bank and Brad L. Smith /12

 10.58    Employment Agreement dated August 26, 1997 between Pacific    (*)
          Capital Bancorp and Clayton C. Larson /13

 10.59    Employment Agreement dated August 26, 1997 between Pacific    (*)
          Capital Bancorp and D. Vernon Horton /13

 10.60    Employment Agreement dated August 26, 1997 between Pacific    (*)
          Capital Bancorp and Dennis A. DeCius /13

 10.61    Employment Agreement dated August 26, 1997 between Pacific    (*)
          Capital Bancorp and Dale R. Diederick /13

 10.62    Amended and Restated Executive Salary Continuation Agreement  (*)
          dated September 23, 1997 between Pacific Capital Bancorp and
          Clayton C. Larson  /13

 10.63    Amended and Restated Executive Salary Continuation Agreement  (*)
          dated September 23, 1997 between Pacific Capital Bancorp and
          D. Vernon Horton /13

 10.64    Amended and Restated Executive Salary Continuation Agreement  (*)
          dated September 23, 1997 between Pacific Capital Bancorp and
          Dennis A. DeCius /13

 10.65    Amended and Restated Executive Salary Continuation Agreement  (*)
          dated September 23, 1997 between Pacific Capital Bancorp and
          Dale R. Diederick /13

 10.67    Executive Salary Continuation Agreement between South Valley  (*)
          National Bank and Brad L. Smith dated March 24, 1998 /14

 10.68    Agreement and Plan of Reorganization between Santa Barbara      
          Bancorp and Pacific Capital Bancorp dated July 20, 1998

 27.      Financial Data Schedule                                         


       (b)   REPORTS ON FORM 8-K

                  No reports  were filed on Form 8-K for the quarter  ended June
                  30, 1998


------------------------

12/ Filed as  exhibits  to the  Company's  Annual  Report on Form 10-K (File No.
0-13528) for the fiscal year ended December 31, 1996,  which are incorporated by
reference.

13/ Filed as exhibits to the Company's  Quarterly  Report on Form 10-Q (File No.
0-13528)  for the period  ended  September  30, 1997 which are  incorporated  by
reference

14/ Filed as exhibits to the Company's  Quarterly  Report on Form 10-Q (File No.
0-13528) for the period ended March 31, 1998 which are incorporated by reference

                                      -24-

<PAGE>


                                   SIGNATURES

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

                                                  Pacific Capital Bancorp


Date August 12, 1998                              /S/ D. Vernon Horton
     ----------------                             ------------------------------
                                                  D. Vernon Horton
                                                  Chairman of the Board
                                                  Chief Executive Officer





Date August 12, 1998                              /S/ Edward J. Czajka
     ----------------                             ------------------------------
                                                  Edward J. Czajka
                                                  Senior Vice President
                                                  Corporate Controller

                                      -25-