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   September 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                                                November 13, 1998
         -----                                                -----------------
         Common stock, no par value                            4,504,949 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                                               10-18

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                18-19


                           PART II - OTHER INFORMATION


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>
                                                              September 30, December 31,
Assets                                                            1998         1997
                                                                ---------    ---------
<S>                                                             <C>          <C>      
Cash and due from banks                                         $  45,907    $  49,982
Federal funds sold and other short term investments                73,151       28,537
                                                                ---------    ---------
      Total cash and equivalents                                  119,058       78,519
Investment securities:
   Available-for-sale securities, at fair value                   234,584      220,984
   Held-to-maturity securities, at amortized cost
     (fair value of $5,309 and $7,347, respectively)                5,272        7,347

Loans held for sale                                                12,208       10,523

Loans held for investment                                         455,257      419,293
   Less allowance for possible loan losses                         (4,646)      (4,266)
                                                                ---------    ---------
      Net loans                                                   450,611      415,027

Premises and equipment, net                                        14,879       15,331
Accrued interest receivable and other, net                         15,980       16,988
                                                                ---------    ---------

Total assets                                                    $ 852,592    $ 764,719
                                                                =========    =========

Liabilities and shareholders' equity

Deposits:
   Demand, non-interest bearing                                 $ 188,058    $ 174,649
   Demand, interest bearing                                        97,260       97,322
   Savings and money market                                       188,158      173,151
   Time certificates                                              283,036      238,276
                                                                ---------    ---------
      Total deposits                                              756,512      683,398

Accrued interest payable and other liabilities                     11,849        8,763
                                                                ---------    ---------

Total liabilities                                                 768,361      692,161

Shareholders' equity:
Preferred stock; 20,000,000 shares authorized and unissued             --           --
Common stock, no par value; 20,000,000 shares authorized;
   4,504,516 and 4,294,403 shares issued and outstanding at
   September 30, 1998  and at December 31, 1997, respectively      62,201       58,434
Retained earnings                                                  19,128       12,852
Accumulated other comprehensive income                              2,902        1,272
                                                                ---------    ---------

Total shareholders' equity                                         84,231       72,558
                                                                ---------    ---------

Total liabilities and shareholders' equity                      $ 852,592    $ 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>

                                                                                             Nine months             Nine months
                                                                                                ended                   ended
                                                                                          September 30, 1998      September 30, 1997
                                                                                          ------------------      ------------------
<S>                                                                                              <C>                     <C>        
Interest income:
   Interest and fees on loans                                                                    $    32,670             $    30,452
   Interest on fed funds sold                                                                          2,196                   1,544
   Interest on investment securities                                                                  10,447                   6,672
                                                                                                 -----------             -----------
     Total interest income                                                                            45,313                  38,668
                                                                                                 -----------             -----------
Interest expense:
   Interest on deposits                                                                               15,487                  12,494
   Other                                                                                                  12                      24
                                                                                                 -----------             -----------
     Total interest expense                                                                           15,499                  12,518
                                                                                                 -----------             -----------
     Net interest income                                                                              29,814                  26,150
 Provision for possible loan losses                                                                    1,035                     910
                                                                                                 -----------             -----------
Net interest income after provision for possible loan losses                                          28,779                  25,240
                                                                                                 -----------             -----------

Other income:
   Service charges                                                                                     2,270                   1,872
   Gain on sale of loans                                                                                  16                      17
   Net gain (loss) on securities transactions                                                            (12)                     11
   Other                                                                                                 589                     518
                                                                                                 -----------             -----------
     Total other income                                                                                2,863                   2,418
                                                                                                 -----------             -----------

Other expenses:
   Salaries and benefits                                                                               9,354                   8,211
   Occupancy                                                                                           1,842                   1,706
   Equipment                                                                                           1,471                   1,271
   Advertising and promotion                                                                             365                     534
   Stationary and supplies                                                                               426                     600
   Legal and professional fees                                                                         1,082                     658
   Regulatory assessments                                                                                192                     164
   Other operating                                                                                     2,013                   1,814
                                                                                                 -----------             -----------
     Total other expenses                                                                             16,745                  14,958

Earnings before income taxes                                                                          14,897                  12,700

Income taxes                                                                                           5,984                   5,028
                                                                                                 -----------             -----------

Net income                                                                                       $     8,913             $     7,672
                                                                                                 ===========             ===========

Basic earnings per share                                                                         $      2.04             $      1.79
                                                                                                 ===========             ===========
Diluted earnings per share                                                                       $      1.97             $      1.72
                                                                                                 ===========             ===========

Weighted average shares outstanding                                                                4,364,169               4,296,864
Dilutive effect of stock options                                                                     169,281                 151,392
                                                                                                 -----------             -----------
Total weighted average diluted shares outstanding                                                  4,533,450               4,448,256
                                                                                                 ===========             ===========
<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
                                                                                           September 30, 1998     September 30, 1997
                                                                                           ------------------     ------------------
<S>                                                                                                <C>                    <C>       
Interest income:
   Interest and fees on loans                                                                      $   11,399             $   10,456
   Interest on fed funds sold                                                                             898                    812
   Interest on investment securities                                                                    3,597                  2,365
                                                                                                   ----------             ----------
     Total interest income                                                                             15,894                 13,633
                                                                                                   ----------             ----------
Interest expense:
   Interest on deposits                                                                                 5,346                  4,510
   Other                                                                                                    7                      3
                                                                                                   ----------             ----------
     Total interest expense                                                                             5,353                  4,513
                                                                                                   ----------             ----------
     Net interest income                                                                               10,541                  9,120
 Provision for possible loan losses                                                                       345                    340
                                                                                                   ----------             ----------
Net interest income after provision for possible loan losses                                           10,196                  8,780
                                                                                                   ----------             ----------

Other income:
   Service charges                                                                                        790                    632
   Gain on sale of loans                                                                                    5                      6
   Net gain (loss) on securities transactions                                                               2                   --
   Other                                                                                                  222                    176
                                                                                                   ----------             ----------
     Total other income                                                                                 1,019                    814
                                                                                                   ----------             ----------

Other expenses:
   Salaries and benefits                                                                                3,123                  2,768
   Occupancy                                                                                              641                    582
   Equipment                                                                                              499                    443
   Advertising and promotion                                                                              151                    191
   Stationary and supplies                                                                                131                    174
   Legal and professional fees                                                                            389                    237
   Regulatory assessments                                                                                  67                     57
   Other operating                                                                                        746                    582
                                                                                                   ----------             ----------
     Total other expenses                                                                               5,747                  5,034

Earnings before income taxes                                                                            5,468                  4,560

Income taxes                                                                                            2,210                  1,811
                                                                                                   ----------             ----------

Net income                                                                                         $    3,258             $    2,749
                                                                                                   ==========             ==========

Basic earnings per share                                                                           $     0.73             $     0.64
                                                                                                   ==========             ==========
Diluted earnings per share                                                                         $     0.71             $     0.62
                                                                                                   ==========             ==========

Weighted average shares outstanding                                                                 4,472,205              4,301,597
Dilutive effect of stock options                                                                      130,198                150,052
                                                                                                   ----------             ----------
Total weighted average diluted shares outstanding                                                   4,602,403              4,451,649
                                                                                                   ==========             ==========
<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>
                                                                                         Nine months            Nine months
                                                                                            ended                  ended
                                                                                      September 30, 1998     September 30, 1997
                                                                                      ------------------     ------------------
<S>                                                                                            <C>                    <C>       
Cash flows from operating activities:
Net income                                                                                     $   8,913              $   7,672
Adjustments to reconcile net income to net cash provided by
     (used in) operating activities:
   Depreciation and amortization                                                                   1,168                  1,096
   Provision for possible loan losses                                                              1,035                    910
   (Gain) loss on sale of investment securities, net                                                  12                    (11)
   Net originations of loans available for sale                                                   (1,685)                (3,904)
   Gain on sale of loans                                                                             (16)                   (17)
   Amortization of loan origination fees, net                                                       (228)                   121
   Change in accrued interest receivable and other assets                                          2,638                   (970)
   Change in accrued interest payable and other liabilities                                        3,102                 (2,291)
                                                                                               ---------              ---------
Net cash provided by (used in) operating activities                                               14,939                  2,606
                                                                                               ---------              ---------

Investing activities:
   Net increase in loans                                                                         (36,562)               (18,311)
   Recoveries on loans                                                                               171                    162
   Maturities of investment securities                                                            45,652                 14,799
   Purchases of investment securities                                                            (76,610)               (49,945)
   Proceeds from sale of available-for-sale securities                                            19,421                   --
   Capital expenditures, net                                                                        (716)                  (752)
                                                                                               ---------              ---------
Net cash used in investing activities                                                            (48,644)               (54,047)
                                                                                               ---------              ---------

Financing activities:
   Net increase in deposits                                                                       73,114                 99,614
   Cash paid for retirement of stock                                                                (875)                  --
   Proceeds from exercise of options                                                               4,642                    452
   Cash paid for dividends                                                                        (2,637)                (1,984)
                                                                                               ---------              ---------
Net cash provided by financing activities                                                         74,244                 98,082
                                                                                               ---------              ---------

Net increase in cash and equivalents                                                              40,539                 46,641
Cash and equivalents at beginning of period                                                       78,519                 76,245
                                                                                               ---------              ---------
Cash and equivalents at end of period                                                          $ 119,058              $ 122,886
                                                                                               =========              =========

Supplemental disclosures of cash flow information:
    Cash paid during the period
     Interest                                                                                  $  15,304              $  12,824
     Income taxes                                                                                  3,735                  4,115
<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>


                                                                                                            Nine months ended
                                                                                                   September 30,      September 30,
                                                                                                            1998               1997
                                                                                                  ----------------------------------
<S>                                                                                                      <C>                <C>     
Net income                                                                                               $  8,913           $  7,672
Net change in unrealized gain on available-for-sale securities                                              1,630                457
Realized gain (loss) on sale of available-for-sale securities, net of taxes                                   (12)                11
                                                                                                         --------           --------
Total comprehensive income for the period                                                                $ 10,531           $  8,140
                                                                                                         ========           ========



                                                                                                            Three months ended
                                                                                                   September 30,      September 30,
                                                                                                            1998               1997
                                                                                                  ----------------------------------
Net income                                                                                               $  3,258           $  2,749
Net change in unrealized gain (loss) on available-for-sale securities                                       2,150                686
Realized gain (loss) on sale of available-for-sale securities, net of taxes                                     2                 --
                                                                                                         --------           --------
Total comprehensive income for the period                                                                $  5,410           $  3,435
                                                                                                         ========           ========
</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
                  September  30, 1998 and December 31, 1997,  the results of its
                  operations, statements of cash flows, and comprehensive income
                  for the periods ended September 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  September 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.  At this time,  the  Company  does not expect
                  this  statement  to have a  material  impact on the  financial
                  condition or results of operations of the Company.

Note 2 -   Consolidation

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

Note 3 -   Loans to Directors

                  In the ordinary course of business, the Company has made loans
                  to  directors  of the Company and their  affiliates,  which at
                  September 30, 1998 amounted to approximately $6,562,000.

                                       8
<PAGE>

Note 4 - Commitments

                  The  Company  had  outstanding  standby  letters  of credit of
                  approximately $3,861,000 at September 30, 1998.

Note 5 - Net Income Per Share and Dividends

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

Note 6 - Taxes

                  As of September 30, 1998, the Company had a deferred tax asset
                  of approximately $1,304,000.  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  the  Company's   common  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.

                                       9
<PAGE>



                                     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 nine months ended  September 30, 1998 was $8,913,000
or $1.97  diluted  earnings per share  compared to  $7,672,000  or $1.72 diluted
earnings per share during the  comparable  period in 1997.  This  represents  an
earnings  per share  increase of 14.0% over 1997.  The increase in net income is
due mainly to a $3,664,000  increase in net interest income. The increase in net
interest income is due to growth in average total earning assets of $135,939,000
or 21.1% partially offset by an increase in average interest bearing deposits of
$93,635,000 as compared to the comparable 1997 period.

         Outstanding  loans were  $467,465,000 at September 30, 1998 compared to
$429,816,000 at December 31, 1997, a $37,649,000 or 8.8% increase. Federal Funds
Sold and  Investment  Securities  at  September  30, 1998 were  $313,007,000,  a
$56,139,000 or 21.9% 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 September 30, 1998 were  $756,512,000
compared to  $683,398,000 at December 31, 1997, a $73,114,000 or 10.7% increase.
Non-interest  bearing demand deposits increased  $13,409,000,  savings and money
market deposit accounts increased $15,007,000, certificates of deposit increased
by $44,760,000  while interest bearing demand deposits  decreased $62,000 during
the first nine 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.

Loans

         Outstanding total loans averaged $444,754,000 for the nine months ended
September 30, 1998 compared to $410,011,000  for the comparable  period in 1997,
an increase of $34,743,000,  or 8.5%. 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  September  30, 1998,
December  31,  1997,  and  September  30,  1997 is  summarized  in  table on the
following page.

                                       10
<PAGE>
<TABLE>


                              Non-performing Loans
                             (Dollars in Thousands)
<CAPTION>

                                                        September 30,         December 31,         September 30,
                                                          1998                     1997                 1997
                                                         ------                   ------               ------
<S>                                                      <C>                      <C>                  <C>   
Accruing loans past due 90 days or more:
      Commercial                                         $  287                   $   26               $   29
      Consumer                                               --                       17                   17
      Real Estate                                            --                       --                   --
                                                         ------                   ------               ------
Total                                                    $  287                   $   43               $   46

Nonaccrual loans:
      Commercial                                            445                    1,278                  524
      Consumer                                              106                      106                  111
      Real Estate                                           352                      766                1,445
                                                         ------                   ------               ------
Total                                                    $  903                   $2,150               $2,080

Total Non-performing Loans                               $1,190                   $2,193               $2,126
                                                         ======                   ======               ======

Non-performing Loans To Total Loans                        0.25%                    0.52%                0.52%
Allowance For Possible Loan Losses to Total
  Non-performing Loans                                   390.42%                  194.53%              196.05%

</TABLE>

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

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

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

         The provision for possible loan losses  charged  against  operations is
based upon the actual net loan losses  incurred plus an amount for other factors
which, in management's judgment, deserve recognition in estimating possible loan
losses.  The Company  evaluates  the adequacy of its allowance for possible loan
losses on a quarterly basis. The Company has also contracted with an independent
loan review  consulting firm to evaluate overall credit quality and the adequacy
of  the  allowance  for  possible  loan  losses.   Both  internal  and  external
evaluations  take into  account  the  following:  specific  loan  conditions  as
determined by management;  the historical  relationship  between charge-offs and
the level of the allowance;  the estimated future loss in all significant loans;
known  deterioration in  concentrations  of credit,  certain classes of loans or
pledged  collateral;  historical  loss  experience  based on volume and types of
loans; the results of any independent review or evaluation of the loan portfolio
quality  conducted  by or at the  direction  of  Company  management  or by bank
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.

                                       11
<PAGE>

         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  September  30,
1998, December 31, 1997, and September 30, 1997:

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

                                      Nine months                 Year               Nine months
                                        Ended                     Ended                 Ended
                                    September 30, 1998       December 31,1997    September 30, 1997
                                    ------------------       ----------------    ------------------
<S>                                      <C>                    <C>                    <C>     
Loans Outstanding, at period end         $455,257               $419,293               $406,342

Average Loans                            $444,754               $411,546               $410,011

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

     Charge-Offs By Loan Category:
         Commercial                           492                    873                    357
         Consumer                             301                     59                     45
         Real Estate                           33                    211                    174
                                         --------               --------               --------
         Total                           $    826               $  1,143               $    576
                                         --------               --------               --------

     Recoveries By Loan Category:
         Commercial                      $    106               $    120               $    102
         Consumer                              56                     24                     21
         Real Estate                            9                     73                     39
                                         --------               --------               --------
         Total                           $    171               $    217               $    162
                                         --------               --------               --------

   Net Charge-Offs                       $    655               $    926               $    414
                                         --------               --------               --------

   Provision Charged
   To Expense                            $  1,035               $  1,520               $    910

Allowance Balance End Of Period          $  4,646               $  4,266               $  4,168
                                         ========               ========               ========

Allowance For Possible Loan Losses
  To Period End Loans                        1.02%                  1.02%                  1.03%

Annualized Net Charge-offs
to Average Loans                             0.20%                  0.23%                  0.13%

</TABLE>

         The  provision  for possible loan losses  charged  against  earnings is
based upon an analysis of the actual migration of loans to losses plus an amount
for other factors  which,  in  management's  judgment,  deserve  recognition  in
estimating  possible  loan losses.  While these  factors  cannot be reduced to a
mathematical  formula,  it is management's  view that the allowance for possible
loan losses of  $4,646,000  or 1.02% of total loans was adequate as of September
30, 1998.

                                       12
<PAGE>

Results of Operations
                      Nine months ended September 30, 1998 
                                  Compared with
                      Nine months ended September 30, 1997 

         Net income for the nine months ended September 30, 1998 was $8,913,000,
an increase of  $1,241,000  or 16.2% 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 $3,664,000  partially  offset by an increase in non-interest
expense of $1,787,000.  The increase in net interest  income is due to growth in
average total earning assets of $135,939,000  partially offset by an increase in
average  interest  bearing  deposits  of  $93,635,000  compared to the same 1997
period.

         The average  balance of interest  earning assets during the nine months
ended September 30, 1998 was $727,776,000,  a 23.0% increase over the comparable
1997 period.  The Company's  average yield on earning assets for the nine months
ended  September  30, 1998  decreased to 8.3% from 8.7% in the  comparable  1997
period.  Total interest income increased $6,645,000 or 17.2% for the nine months
ended September 30, 1998 compared to the same 1997 period due to the increase in
average interest earning assets.

         Average  deposits for the Company for the nine months  ended  September
30, 1998 was $707,311,000, a $123,338,000 or 21.1% increase compared to the same
period ended  September 30, 1997.  The  Company's  average cost of funds for the
nine months  ended  September  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 5.9% for the  comparable  1997 period.  Interest  expense of
$15,499,000 for the nine months ended September 30, 1998 was $2,981,000 or 23.8%
over the comparable 1997 period due to an increase in average  interest  bearing
deposits of $93,635,000  and an increase in the Company's cost of funds of 0.1%.
Net  interest  income for the nine months  ended  September  30, 1998  increased
$3,664,000 or 14.0%.

         The Company made a provision to the  allowance for possible loan losses
of $1,035,000 in the nine months ended  September 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 are adequate based on the Company's calculated provision requirements.

         Total loans  charged-off  net of  recoveries  for the nine months ended
September 30, 1998 amounted to $655,000 compared to $414,000 for the same period
in 1997.  Annualized  net loan  charge-offs as a percentage of average loans for
the nine months  ended  September  30, 1998 was 0.20%  compared to 0.13% for the
nine months ended  September 30, 1997 and 0.23% for the year ended  December 31,
1997.

         Total other income was $2,863,000  for the nine months ended  September
30,  1998,  a $445,000  or 18.4%  increase  compared to the same period in 1997.
Service  charges on deposit  accounts  increased  by  $398,000 or 21.3% over the
comparable  period  in 1997.  The net gain  (loss)  on  securities  transactions
decreased by $23,000 offset by other income which increased by $71,000  compared
to the nine months ended September 30, 1997.

         Salaries and benefits  expense for the nine months ended  September 30,
1998 was  $9,354,000,  a $1,143,000 or 13.9% 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 273
full time  equivalent  employees at September 30, 1998 compared to 285 full time
equivalent employees at December 31, 1997 and 271 full time equivalent employees
at September 30, 1997.

         Total other  expenses,  excluding  salaries and benefits,  for the nine
months ended  September 30, 1998,  was  $7,391,000,  a $644,000 or 9.5% increase
from the  comparable  1997 period.  This was primarily due to increases in legal
and  professional  expense  and  equipment  expense of  $424,000  and  $200,000,
respectively. These increases were partially offset by a decrease in advertising
and  promotion  expense of  $169,000  and a decrease  in  stationery  expense of
$174,000.

         Applicable  income  taxes  of  $5,984,000  for the  nine  months  ended
September 30, 1998 were $956,000, or 19.0% more than the comparable 1997 period.
The Company's  effective  tax rate for the nine months ended  September 30, 1998
was 40.2% compared to 39.6% for the same period in 1997.

                                       13

<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 $857,000 and $1,040,000 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                                               $215,635        6.2%      $9,985     $129,910         6.4%        $6,200
  Non-taxable                                             13,374        4.6%         462       13,270         4.9%           491
  Federal funds sold                                      54,013        5.4%       2,196       38,646         5.3%         1,544
---------------------------------------------------------------------------------------------------------------------------------
Total investment securities                              283,022        6.0%      12,643      181,826         6.1%         8,235

Loans                                                    444,754        9.8%      32,670      410,011         9.9%        30,433
---------------------------------------------------------------------------------------------------------------------------------

Total earning assets                                     727,776        8.3%      45,313      591,837         8.7%        38,668
Non-earning assets:
  Premises and equipment                                  15,217                               15,294
  Other                                                   49,801                               47,582
---------------------------------------------------------------------------------------------------------------------------------

Total non-earning assets                                  65,018                               62,876
---------------------------------------------------------------------------------------------------------------------------------

Total assets                                            $792,794                             $654,713
=================================================================================================================================

Liabilities and Shareholders' Equity
 Interest-bearing deposits:
  Demand                                                 $93,666        1.1%        $776     $ 84,233         1.1%          $692
  Savings and money market                               183,657        3.1%       4,229      165,720         2.8%         3,483
  Time certificates                                      271,111        5.2%      10,482      204,846         5.4%         8,319
  Other interest-bearing liabilities                         426        3.8%          12          541         5.9%            24
---------------------------------------------------------------------------------------------------------------------------------

Total interest-bearing liabilities                       548,860        3.8%      15,499      455,340         3.7%        12,518
Non interest-bearing deposits
and other liabilities:
  Demand, non interest-bearing                           158,877                              129,174
  Other liabilities                                        7,579                                3,181
  Shareholder's equity                                    77,478                               67,018
---------------------------------------------------------------------------------------------------------------------------------

Total other liabilities                                  243,934                              199,373
---------------------------------------------------------------------------------------------------------------------------------

TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY                                    $792,794                             $654,713
=================================================================================================================================

NET INTEREST INCOME                                                               $29,814                                 $26,150
NET INTEREST MARGIN                                                     5.5%                                  5.9%
---------------------------------------------------------------------------------------------------------------------------------
<FN>

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.
</FN>
</TABLE>

Results of Operations
                     Three months ended September 30, 1998 
                                  Compared with
                     Three months ended September 30, 1997 

         Net  income  for  the  three  months  ended   September  30,  1998  was
$3,258,000,  an  increase  of  $509,000  or 18.5% as  compared  to the same 1997
period.  The  increase  in net income for the  period  was due  primarily  to an
increase in net interest income of $1,421,000 partially offset by an increase in
non-interest expense of $713,000.  The increase in net interest income is due to
growth in average total earning assets of $135,233,000 or 21.5% partially offset
by an increase in average  interest  bearing  deposits of  $86,986,000  or 18.1%
compared to the same 1997 period.

         The average balance of interest  earning assets during the three months
ended September 30, 1998 was $765,515,000,  a 21.5% increase over the comparable
1997 period.  The Company's average yield on earning assets for the three months
ended  September  30, 1998  decreased to 8.2% from 8.6% in the  comparable  1997

                                       14
<PAGE>

period. Total interest income increased $1,421,000 or 15.6% for the three months
ended September 30, 1998 compared to the same 1997 period due to the increase in
average interest earning assets.

         Average  total  deposits  for the  Company for the three  months  ended
September 30, 1998 was  $741,992,000,  a $119,501,000 or 19.2% increase compared
to the same period ended September 30, 1997. The Company's average cost of funds
for the three  months  ended  September  30,  1998 was 3.7% 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 5.7% for the comparable 1997 period.  Interest expense of
$5,353,000  for the three months ended  September 30, 1998 was $840,000 or 18.6%
over the comparable 1997 period due to an increase in average  interest  bearing
deposits of $86,987,000.

         The Company made a provision to the  allowance for possible loan losses
of $345,000 in the three months ended  September  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 are adequate based on the Company's calculated provision requirements.

         Total other income was $1,019,000 for the three months ended  September
30,  1998,  a $205,000  or 25.2%  increase  compared to the same period in 1997.
Service  charges on deposit  accounts  increased  by  $158,000 or 25.0% over the
comparable period in 1997. Other income, which consists of mortgage banking fees
and other  miscellaneous  income  increased  $46,000  compared  to the same 1997
period.

         Salaries and benefits  expense for the three months ended September 30,
1998 was  $3,123,000,  a $355,000 or 12.8%  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  September 30, 1998, was  $2,624,000,  a $358,000 or 15.8% increase
from the comparable 1997 period.  This was primarily due to an increase in legal
and  professional  expense  of  $152,000  and an  increase  in other  expense of
$164,000.These  increases  were  partially  offset by a decrease  in  stationery
expense of $43,000 and a decrease in advertising expense of $40,000.

         Applicable  income  taxes of  $2,210,000  for the  three  months  ended
September 30, 1998 were $399,000, or 22.0% more than the comparable 1997 period.
The Company's  effective tax rate for the three months ended  September 30, 1998
was 40.4% compared to 39.7% for the same period in 1997.

                                       15
<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 $330,000 and $308,000 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                                               $227,027        6.1%      $3,460     $138,959         6.3%        $2,201
  Non-taxable                                             12,362        4.4%         138       13,240         4.9%           164
  Federal funds sold                                      65,296        5.5%         898       59,714         5.4%           812
---------------------------------------------------------------------------------------------------------------------------------
Total investment securities                              304,685        5.9%       4,496      211,913         5.9%         3,177

Loans                                                    460,830        9.8%      11,398      418,369         9.9%        10,456
---------------------------------------------------------------------------------------------------------------------------------

Total earning assets                                     765,515        8.2%      15,894      630,282         8.6%        13,633
Non-earning assets:
  Premises and equipment                                  15,038                               15,098
  Other                                                   52,561                               52,117
---------------------------------------------------------------------------------------------------------------------------------

Total non-earning assets                                  67,600                               67,215
---------------------------------------------------------------------------------------------------------------------------------

Total assets                                            $833,114                             $697,497
=================================================================================================================================

Liabilities and Shareholders' Equity
 Interest-bearing deposits:
  Demand                                                $ 97,608        1.1%      $  267     $ 87,629         1.4%        $  301
  Savings and money market                               190,451        3.6%       1,725      171,334         2.7%         1,159
  Time certificates                                      279,281        4.8%       3,354      221,391         5.5%         3,050
  Other interest-bearing liabilities                         743        3.7%           7          382         3.1%             3
---------------------------------------------------------------------------------------------------------------------------------

Total interest-bearing liabilities                       568,083        3.7%       5,353      480,736         3.7%         4,513
Non interest-bearing deposits
And other liabilities:
  Demand, non interest-bearing                           174,652                              142,137
  Other liabilities                                        8,395                                5,038
  Shareholder's equity                                    81,984                               69,586
---------------------------------------------------------------------------------------------------------------------------------

Total other liabilities                                  265,031                              216,761
---------------------------------------------------------------------------------------------------------------------------------

TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY                                    $833,114                             $697,497
=================================================================================================================================

NET INTEREST INCOME                                                               $10,541                                 $ 9,120
NET INTEREST MARGIN                                                     5.5%                                  5.7%
---------------------------------------------------------------------------------------------------------------------------------
<FN>

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.

</FN>
</TABLE>

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 are deemed critical.  The Company uses
third  party  software to run and operate  all  mainframe  applications  and the
testing of most of those systems has been performed by the software provider and
the Company is in the process of verifying the results of that testing. Based on
data received so far, the Company anticipates  spending  approximately  $300,000
throughout  1998 and 1999 on the  Year  2000  problem  which  includes  personal
computer upgrades.

During the third  quarter,  the Company's loan officers  completed  their second
review of the loan  portfolio,  which  included  all  large  loan  customers  to
determine their Year 2000 state of readiness. Large credit customers, comprising
over 60% of the Company's  outstanding loans,  cooperate with the Company's loan
officers in assessing their  operating  risks  associated with the Year 2000. At
this time,  the  Company is pleased to report  that the  majority  of large loan
customers are considered to be at a low risk to the Year 2000 computer problem.

                                     16
<PAGE>

As a  financial  institution,  the  Company is reliant on the rapid  transfer of
funds electronically to and from a wide network of customers,  including but not
limited to other financial  institutions all over the United States.  Failure in
the  payment  system  in whole or in part  would  delay the  transfer  of funds,
largely  affecting the  Company's  ability to operate  effectively.  Contingency
plans for continuing  operations  have been developed for a variety of disasters
under guidelines established by the Federal Financial  Institutions  Examination
Council. Examples of contingency planning include contracting with a third party
to provide mainframe data processing  services from a remote location as well as
maintaining multiple offsite data tape storage locations.


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
September 30, 1998,  the total of cash and due from banks,  overnight fed funds,
money  market  mutual  funds,  and  available-for-sale   securities  represented
$353,642,000  or 46.7% of total deposits  compared to  $299,503,000  or 43.8% at
year end  1997.  This  increase  in  liquid  assets  for the nine  months  ended
September 30, 1998 resulted  primarily  from an increase in deposits  which were
invested in fed funds sold and available-for-sale investment securities.

         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

                                       17
<PAGE>

institutions  will be required  to maintain a leverage  ratio of at least 100 to
200 basis points above the 3% minimum.

<TABLE>
         The  following  tables show the  Company's  and the  Subsidiary  Banks'
risk-based  and leverage  capital ratios as of September 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 September 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                                $  79,157      14.01%      $ 17,967         10.90%     $ 48,325        12.44%
Tier 1 capital minimum
   requirement                                   22,596       4.00%         6,593          4.00%       15,539         4.00%
======================================== =============== =========== ============= ============== ============ =============
      Excess                                     56,561      10.01%        11,374          6.90%       32,786         8.44%
======================================== =============== =========== ============= ============== ============ =============
Total capital                                    83,802      14.83%        19,764         11.99%       51,147        13.17%
Total capital minimum
    requirement                                  45,192       8.00%        13,185          8.00%       31,078         8.00%
---------------------------------------- --------------- ----------- ------------- -------------- ------------ -------------
      Excess                                     38,610       6.83%         6,579          3.99%       20,069         5.17%
======================================== =============== =========== ============= ============== ============ =============
Risk-adjusted assets                          $ 564,894                  $164,817                    $388,471
======================================== =============== =========== ============= ============== ============ =============

-----------------------------------------------------------------------------------------------------------------------------------
Leverage Capital Ratio
As of September 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)             $  79,157       9.53%      $ 17,967          7.64%     $ 48,325         8.28%
Minimum leverage requirement                     24,909 to    3.00% to      7,053 to       3.00% to    17,514 to      3.00% to
                                                 41,515       5.00%        11,755          5.00%       29,191         5.00%
-----------------------------------------   ------------- ------------ -------------- -------------- ------------ -----------
      Excess                                     37,642 to    4.53% to      6,212 to       2.64% to    19,134 to      3.28% to
                                                 54,248       6.53%        10,914          4.64%       30,811         5.28%
=========================================   ============= ============ ============== ============== ============ ===========
Total quarterly average assets                $ 830,293                  $235,094                    $583,812
=========================================   ============= ============ ============== ============== ============ ===========

</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

                                       18
<PAGE>

tolerances at this time. No  significant  changes to the market risk or interest
rate risk of the Company have occurred since December 31, 1997.

         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.




                                       19
<PAGE>

<TABLE>

PART II -- OTHER INFORMATION


ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

         (a) INDEX TO EXHIBITS
<CAPTION>

Exhibit                                                                                   Sequentially
Number                                          Exhibit                                  Numbered Page
------                                          -------                                  -------------
<S>               <C>                                                                         <C>     
      2.1         Agreement and Plan of Reorganization between Santa Barbara (*)
                  Bancorp and Pacific Capital Bancorp dated July 20, 1998 15/

      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/
<FN>

*/       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

      27.         Financial Data Schedule                                                      26

(b)      REPORTS ON FORM 8-K
                       No reports were filed on Form 8-K for the quarter ended September 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

15/ Filed as exhibits to the Company's  Quarterly  Report on Form 10-Q (File No.
0-13528) for the period ended June 30, 1998 which are incorporated by reference
</FN>
</TABLE>



                                       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 November 13, 1998                          /S/ D. Vernon Horton   
     -----------------                          -----------------------
                                                D. Vernon Horton
                                                Chairman of the Board
                                                Chief Executive Officer





Date November 13, 1998                          /S/ Dennis A. DeCius  
     -----------------                          ------------------------
                                                Dennis A. DeCius
                                                Executive Vice President
                                                Chief Financial Officer




                                       25