SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                    FORM 10-K


[ X ] ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
ACT OF 1934 For the Fiscal Year Ended: December 31, 1997

                                       or

[   ] TRANSACTION  REPORT  PURSUANT TO  SECTION  13 OR 15(d)  OF THE  SECURITIES
EXCHANGE ACT OF 1934 For the transition period from __________ to __________

                         Commission File Number: 0-13528

                             PACIFIC CAPITAL BANCORP
--------------------------------------------------------------------------------
             (Exact Name of registrant as specified in its charter)

          California                                       77-0003875
--------------------------------------------------------------------------------
(State or other jurisdiction of                           (IRS Employer
 incorporation or organization)                         Identification No.)

  307 Main Street, Salinas, California                        93901
--------------------------------------------------------------------------------
(Address of principal executive offices)                    (Zip code)

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

                           Common Stock, No Par Value
                           --------------------------

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


Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ X ]

Aggregate  market value of common stock held by nonaffiliates of Pacific Capital
Bancorp  at March 1,  1998:  $138,921,000  Number  of  shares  of  Common  Stock
outstanding at March 1, 1998: 4,310,155

Documents Incorporated by Reference:   Location in Form 10-K
------------------------------------   ---------------------

1997 Annual Report to Shareholders     Part I, Items 1 and 2

Proxy Statement for 1998 Annual        Part III, Items 10, 11, 12 and 13
Meeting of Shareholders
                                       THIS REPORT INCLUDES A TOTAL OF 142 PAGES
                                                     EXHIBIT INDEX IS ON PAGE 70
<PAGE>

<TABLE>
                                                     TABLE OF CONTENTS
<CAPTION>
                                                                                        Page
---------------------------------------------------------------------------------------------------------------------
                                                                   Form 10-K        Annual Report         Proxy
                                                                                         (1)          Statement (2)
                                                              -------------------- ----------------- ----------------
<S>                                                           <C>                  <C>               <C>
Part I
Item 1      Business                                          1
              Selected Statistical Information                4
                Distribution of Average Assets,
            Liabilities,
                  Shareholders' Equity;
                  Interest Rates and Interest Differential    5                    27-29
                Investment Portfolio                          5                    12-13, 35-36
                Loan and Lease Portfolio                      5                    8, 14-15, 31-32
                Summary of Loan Loss Experience               6                    33
                Deposits                                      6                    10-11
                Financial Ratios                              6                    2
              Competition                                     6-7
              Supervision and Regulation                      8-9
                Capital Standards                             9-11                 40-41
Item 2      Properties                                        12
Item 3      Legal Proceedings                                 13
Item 4      Submission of Matters to a Vote of
               Securities Holders                             13
Part II
Item 5      Market for Registrant's Common Stock and
               Related Stockholder Matters                    13                   45
Item 6      Selected Financial Data                           13                   1
Item 7      Management's Discussion and Analysis of
               Financial Condition and Results of
               Operations                                     13                   22-45
Item 7a     Quantitative and Qualitative Disclosures
               About Market Risk                              13-14
Item 8      Financial Statements and Supplementary Data       14                   2-26
Item 9      Changes in and Disagreements with
               Accountants on Accounting and Financial
               Disclosure                                     14
Part III
Item 10     Directors and Executive Officers of the
               Registrant                                     15                                     4-9
Item 11     Executive Compensation                            15                                     9-13
Item 12     Security Ownership of Certain Beneficial
               Owners and Management                          15                                     4-5
Item 13     Certain Relationships and Related Transactions    15                   15, 23            13
Part IV
Item 14     Exhibits, Financial Statement Schedules and
               Reports on Form 8-K                            16                   1-26
<FN>

(1) The 1997 Annual Report to  Shareholders,  portions of which are incorporated
by reference into this Form 10-K.

(2) The Proxy Statement dated for the Annual Meeting of  Shareholders,  portions
of which are incorporated by reference into this Form 10-K.
</FN>
</TABLE>

                                       ii
<PAGE>

                                     PART I

ITEM 1   BUSINESS

GENERAL

         Pacific  Capital  Bancorp (the  "Company") is a California bank holding
company  headquartered  in Salinas,  California and  incorporated on January 26,
1983. Its principal  wholly-owned  subsidiaries,  First National Bank of Central
California  (formerly First National Bank of Monterey County) ("First National")
commenced  operations on April 2, 1984,  and South Valley  National Bank ("South
Valley") commenced operations on April 21, 1982.

On November 20, 1996, the Company acquired South Valley  Bancorporation  ("SVB")
and  its  banking  subsidiary,  South  Valley,  headquartered  in  Morgan  Hill,
California. Each share of SVB common stock outstanding on November 20, 1996, was
converted  into 0.92 shares of the  Company's  common  stock.  The  consolidated
financial  statements  of the Company give effect to the merger,  which has been
accounted for as a pooling-of-interests.  Accordingly,  the accounts of SVB have
been  combined  with  those of the  Company  for all  periods  presented.  First
National and South Valley are collectively referred to herein as the "Subsidiary
Banks."

         First  National is a full service  commercial  bank  serving  Monterey,
Salinas, Carmel,  Watsonville,  and surrounding areas in Monterey and Santa Cruz
Counties in California.

         South Valley is a full  service  commercial  bank serving  Morgan Hill,
Gilroy,  Hollister,  San Juan Bautista, and surrounding areas in Santa Clara and
San Benito Counties in California.

         The Company  itself does not engage in any  business  activities  other
than the  ownership  of the  Subsidiary  Banks  and the  ownership  of one other
wholly-owned  subsidiary,  Pacific  Capital  Services  Corporation,  an inactive
subsidiary.


General Banking Services

         The  Subsidiary  Banks  provides  a wide  range of  commercial  banking
services to individuals,  professionals, and small- and medium-sized businesses.
The services  provided include those typically offered by commercial banks, such
as: checking,  interest  checking and savings accounts,  travelers checks,  safe
deposit boxes,  collection  services,  night depository  facilities and wire and
telephone transfers.  In addition to the above deposit services,  the Subsidiary
Banks also  provide a full array of loan  products  including  commercial,  real
estate and  consumer  loans as well as a variety  of  government  assisted  loan
programs such as SBA or Rural Economic Community  Development Service guaranteed
loans.  Professional  firms,  individuals  and  businesses  form the core of the
Subsidiary Banks customer and deposit bases.

                                       1
<PAGE>

         The  Subsidiary  Banks  maintain lobby hours between 9:00 a.m. and 5:00
p.m.,  Monday  through  Thursday  and between 9:00 a.m. and 6:00 p.m. on Friday.
South  Valley's  Gilroy and  Hollister  offices  are also open from 9:00 a.m. to
12:00 p.m. on  Saturday.  In addition  to a broad range of retail  products  and
services,  the Subsidiary  Banks offer courier pick-up  service,  nationwide ATM
access available through the Star(R) system,  Cirrus(R),  Plus(R) Explore(R) and
Ca$h24(R),  and point of sale transactions  through  Explore(R),  Maestro(R) and
Discover/Novus(R),  merchant bank card support with  electronic  ticket capture,
self directed IRA, discount  brokerage services and consumer and business credit
cards.  First National also offers offsite ATM access at the Prunetree  Shopping
Center, Prunedale,  California and at the Monterey Pennisula College,  Monterey,
Calififornia. The Subsidiary Banks do not offer trust services.

         Most of the Subsidiary  Banks  deposits are obtained from  individuals,
professionals  and small- and medium-sized  businesses.  As of December 31, 1997
the Subsidiary Banks had a total of 34,524 accounts representing 18,940 interest
bearing and non-interest  bearing  checking  accounts with an average balance of
approximately  $11,410 each;  11,434  savings and money market  accounts with an
average  balance of  approximately  $14,421 each;  and 4,150 other time deposits
with an average balance of approximately  $40,046 each. The Subsidiary Banks are
members of the  Federal  Deposit  Insurance  Corporation  (the  "FDIC")  and the
deposits of each depositor of the Subsidiary Banks are insured up to $100,000.

         The Subsidiary Banks engage in a full complement of lending activities,
including  commercial,  consumer/installment  and short-term  real estate loans,
with a particular  emphasis on short- and  medium-term  commercial  obligations.
Commercial  lending  activities  are  directed   principally  toward  small-  to
medium-sized businesses,  such as professional firms, retail, light industry and
manufacturing  to which the Subsidiary Banks make (a) loans for working capital,
(b) loans secured by receivable and inventory, (c) term loans for equipment; and
(d) real  estate  development  loans.  In addition  to  conventional  commercial
lending,  the Subsidiary  Banks also offer an array of government  assisted loan
products including SBA guaranteed loans, SBA 504 loans (primarily for commercial
real  estate  transactions),   Rural  Economic  Community  Development  Services
guaranteed loans and loans  guaranteed  under the State of California  guarantee
program.  The  Subsidiary  Banks  also  work  to meet  the  needs  of the  local
municipalities  by  providing  lease  financing  for a wide variety of equipment
purchases  including  energy  retrofit,   fire  trucks,  police  cars,  portable
classrooms,  etc.  Consumer  lending is oriented  primarily  to the needs of the
Subsidiary  Banks customers,  with an emphasis on automobile  financing and real
estate loans. Real estate loans include home loans and equity advance loans.

         In addition,  the Subsidiary Banks offer construction loans,  generally
for  single-family   residences  and  multi-unit   projects.   Real  estate  and
construction  loans are typically secured by first deeds of trust and guarantees
from principals of the borrower.  The economic  viability of the project and the
borrower's credit worthiness are primary considerations in the loan underwriting
decision.  The Subsidiary Banks use independent local  appraisers,  conservative
loan-to-value  ratios and close  monitoring of the projects during  construction
phases,  and in the absence of rapid  declines in real estate  values,  ultimate
collectibilty  of these  secured loans is  considered  by the  Subsidiary  Banks
management to be better than the average mix of commercial loans. The Subsidiary
Banks do not make  long-term  fixed  rate  real  estate  loans  and,  therefore,
material  sustained  increases or decreases in general interest rate levels have
only a short-term effect on the Subsidiary Banks net yield on real estate loans.

                                       2
<PAGE>

         The  Subsidiary  Banks  concentrate  their  lending  activities  in the
following  areas:  real  estate  loans,  commercial  loans,  consumer  loans  to
individuals,  and other loans.  As of December 31, 1997,  these four  categories
accounted for approximately  64.2%,  26.4%, 5.9%, and 3.5% respectively,  of the
Company's loan  portfolio.  As of December 31, 1997, the Company had total loans
outstanding of $419,293,000.  No material portion of the Subsidiary  Bank's loan
portfolio  is  concentrated  within  a  single  industry  or  group  of  related
industries.

         The interest rates charged for the various loans made by the Subsidiary
Banks vary with the degree of risk, size, and maturity of the loans involved and
are generally  affected by competition,  governmental  regulation and by current
money market rates.

         The Company's  consolidated  financial  statements  are prepared on the
accrual basis of accounting, including the recognition of interest income on the
loan  portfolio.  The  Subsidiary  Banks  follow  the policy of  non-accrual  of
interest on a loan when principal or interest is 90 days or more past due unless
the loan is well secured and in the process of collection.  Interest income from
non-accrual  loans is not accrued on the books, but rather is recorded only when
and if received.  When a loan is placed on a non-accrual  basis,  any previously
accrued but unpaid  interest is reversed  and  charged  against  current  income
unless there is adequate collateral to assure recovery of the accrued interest.

Correspondent Banks

         The Subsidiary Banks have correspondent  relationships with Wells Fargo
Bank,  N.A.,  Union Bank of  California.,  Bank of  America,  N.T.&  S.A.,  City
National Bank and the Federal Reserve Bank of San Francisco. These relationships
are a result of the Subsidiary  Banks efforts to obtain a wide range of services
for the Subsidiary  Banks and its customers and, as net sellers of federal funds
(overnight  interbank loans), to minimize the risk of an undue  concentration of
its resources with a few entities.  The Subsidiary Banks do not currently serve,
nor do they have plans to serve, as a correspondent to other banks.

         The  correspondent   banks  perform  the  following  services  for  the
Subsidiary Banks: arrange loan participations;  purchase and sell federal funds;
obtain lines for letters of credit; buy and sell investment securities; safekeep
the  Subsidiary  Banks  investment  securities;  send and receive  foreign  wire
transactions and data processing services.

Existing Locations

         First  National  currently  operates six branch  offices:  the Monterey
branch located at 495 Washington Street, Monterey; the Salinas branch located at
1001 South Main Street,  Salinas; the Oldtown office located at 307 Main Street,
Salinas; the Carmel branch located in the Carmel Rancho Shopping Center, Carmel;
the Watsonville branch located at 655 Main Street, Watsonville:  and the Soledad
branch  located at 695 Front Street,  Soledad.  First  National  offers  offsite
24-hour ATM services and night depository  facilities at the Prunetree  Shopping
Center located in Prunedale,  and ATM services located at the Monterey Peninsula
College,  Monterey,  California. The Company's loan administration department is
located at 517 S. Main Street,  Salinas.  In addition to a banking  office,  the
Oldtown office

                                       3
<PAGE>

located at 307 Main Street,  Salinas houses all of the Company's  administrative
functions  as  well  as  the  Data   Processing/Operations   department   and  a
Community/Board room.

         South Valley  currently  operates four branch offices:  the Morgan Hill
branch located at 500 Tennant  Station in Morgan Hill; the Gilroy branch located
at 8000 Santa Teresa  Boulevard,  Gilroy;  the Hollister  branch located at 1730
Airline  Highway,  Hollister;  and the San Juan Bautista  branch  located at 301
Third Street, San Juan Bautista.

         As of December 31, 1997, the Company and the Subsidiary  Banks employed
280 full-time equivalent employees.

Other Information Concerning the Company and the Subsidiary Banks

         The  Company  and  its  Subsidiary  Banks  hold  no  material  patents,
trademarks, licenses, franchises or concessions except for the written approvals
issued by the Office of the  Comptroller  of the  Currency  (the  "OCC") for the
Subsidiary Banks' banking offices.

         No material  expenditures  were made by the  Company or its  Subsidiary
Banks during the last three fiscal years on research and development  activities
relating to the development of services or the improvement of existing services.

         Based upon present business activities,  compliance with federal, state
and local provisions regulating discharge of materials into the environment will
have no material effect upon the capital expenditures,  earnings and competitive
position of the Company or its Subsidiary Banks.

Pacific Capital Services Corporation

         PCSC,  a  wholly-owned   inactive   subsidiary  of  the  Company,   was
incorporated  on April 22, 1985, to arrange and broker  residential,  commercial
and construction loans and other extensions of credit.

SELECTED STATISTICAL INFORMATION

         Consolidated  statistical  information  concerning  the business of the
Company and the  Subsidiary  Banks is set forth in  Management's  Discussion and
Analysis  of  Financial  Condition  and  Results  of  Operations  ("Management's
Discussion and Analysis") on pages 22 through 45 the Company's  Annual Report to
Shareholders  for the fiscal year ended December 31, 1997, (the "Annual Report")
and in Notes 1-14 to the Consolidated Financial Statements on pages 1 through 21
of the Annual Report,  which pages of the Annual Report are incorporated  herein
by  reference.   This  information  should  be  read  in  conjunction  with  the
Consolidated  Financial  Statements and the Notes thereto included in the Annual
Report which have been incorporated herein by reference.



                                       4
<PAGE>

Distribution of Average Assets, Liabilities and Shareholders' Equity;
Interest Rates and Interest Differential

         The Company's average consolidated balance sheet and an analysis of net
interest  earnings for the years ended  December 31, 1997,  1996 and 1995 is set
forth in Management's Discussion and Analysis on page 27 of the Annual Report.

         A table  setting  forth the  changes in  interest  income and  interest
expense in 1997 and 1996  resulting  from changes in volume and changes in rates
is set forth in  Management's  Discussion  and Analysis on page 28 of the Annual
Report.

Investment Portfolio

         The  amortized  cost and  estimated  fair  values of each  category  of
investment  securities  at December 31,  1997,  and 1996 and the  maturities  of
investment securities at December 31, 1997, are set forth in Note 5 of the Notes
to Consolidated Financial Statements on pages 12 and 13 of the Annual Report.

         At December 31, 1997,  investment securities from the following issuers
each totaled over ten percent (10%) of shareholder's equity of the Company:

                                                  Amortized        Estimated
                                                  Cost             Fair value

         Available-for-sale securities:

            U.S. Treasury and Agencies            $  87,591,000    $  88,247,000
            Agency Mortgage-Backed Securities     $ 121,769,000    $ 123,095,000


Loan and Lease Portfolio

          The  composition  of the loan and lease  portfolio  for the five years
ended at December 31, 1997, is set forth in Management's Discussion and Analysis
on page 32 of the Annual Report.

          Maturities  and  sensitivity  to changes in interest rates in the loan
and lease portfolio,  including real  estate-mortgage  and consumer loans, as of
December 31, 1997,  are  summarized in  Management's  Discussion and Analysis on
page 33 of the Annual Report.

          The  composition of nonaccrual,  past due and  restructured  loans and
leases for the five years ended  December  31,  1997,  and a  discussion  of the
Company's  policy  for  placing  loans  on  nonaccrual  status  is set  forth in
Management's Discussion and Analysis on page 37 of the Annual Report.


                                       5
<PAGE>

Summary of Loan Loss Experience

         An analysis of loan loss  experience  for the five years ended December
31, 1997 and a description of the factors which influenced management's judgment
in determining the amount of the additions to the allowance charged to operating
expenses in each fiscal period,  as well as a discussion of the risk elements in
the loan  portfolio,  are set forth in  Management's  Discussion and Analysis on
page 35of the Annual Report.

Deposits

         The  average  amount  of and the  average  rate  paid on major  deposit
categories for the years ended December 31, 1997,  1996 and 1995 is set forth in
Management's Discussion and Analysis on page 39 of the Annual Report.

         The  maturity of time  certificates  of deposit of $100,000 or more and
other time  deposits of $100,000 or more at December 31,  1997,  is set forth in
Management's Discussion and Analysis on page 39 of the Annual Report.

Financial Ratios

         Certain  ratios of  profitability,  liquidity and capital for the years
ended December 31, 1997, and 1996 are summarized in the Selected  Financial Data
on page 1 of the Annual Report.


COMPETITION

         In California and in the Subsidiary Banks primary service areas,  major
banks dominate the commercial banking industry. Among the advantages which these
banks have over the Subsidiary  Banks are their ability to finance  wide-ranging
advertising campaigns and to allocate their investment assets,  including loans,
to regions of higher  yield and  demand.  By virtue of their  larger  amounts of
capital,  such institutions have  substantially  greater lending limits than the
Subsidiary  Banks and perform  certain  functions,  including trust services and
international  banking,  which are not offered  directly by the Subsidiary Banks
but are offered indirectly through its correspondent institutions.

         First  National's  primary service area consists of Monterey County and
Southern  Santa Cruz  County and  encompasses  the cities of  Monterey,  Carmel,
Pacific Grove,  Seaside,  Marina, Sand City, Del Rey Oaks,  Salinas,  Prunedale,
Watsonville,  Soledad, Gonzales,  Greenfield,  King City, and the unincorporated
communities of Pebble Beach,  Carmel Valley and North Monterey County.  Based on
data as of the most  recent  practicable  date,  June 30,  1997,  there  were 99
financial  institutions  with  $4,184.2  million in deposits  serving this area.
First National's market share at June 30, 1997 was as follows 1:


                                       6
<PAGE>
<TABLE>
<CAPTION>
                                                                            First National
                                              Total Deposits                      Deposits                 First National
Service Area                                  (in thousands)                (in thousands)                   Market Share
--------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>                             <C>                               <C>
Monterey                                          $1,380,394                      $140,859                          10.2%
Salinas                                            1,446,156                       167,983                          11.6%
Carmel                                               522,268                        58,848                          11.3%
Watsonville                                          616,842                        57,291                           9.3%
Soledad                                              218,494                        30,681                          14.0%
--------------------------------------------------------------------------------------------------------------------------
Total                                             $4,184,154                      $455,662                          10.9%
==========================================================================================================================
</TABLE>
<TABLE>

           South  Valley's  primary  service area is Southern Santa Clara County
and San  Benito  County,  which  includes  the  cities of Morgan  Hill,  Gilroy,
Hollister  and  San  Juan  Bautista.  Based  upon  data  as of the  most  recent
practicable  date,  June 30,  1997,  there were 29 financial  institutions  with
$1,062.2  million in deposits  serving this area. South Valley's market share at
June 30, 1997 was as follows 1:
<CAPTION>
                                                                               South Valley
                                               Total Deposits                      Deposits                  South Valley
Service Area                                   (in thousands)                (in thousands)                  Market Share
--------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                            <C>                             <C>
Morgan Hill                                          $336,742                       $69,757                         20.7%
Gilroy                                                343,493                        74,941                         21.8%
Hollister                                             365,930                        26,840                          7.3%
San Juan Bautista                                      16,015                        11,521                         71.9%
==========================================================================================================================
Total                                              $1,062,180                      $183,059                         17.2%
==========================================================================================================================
<FN>

1 Sheshunoff(TM)Information Services Branches of California and Hawaii, June 1997 Data.
</FN>
</TABLE>

         Other entities,  both governmental and in private industry,  seeking to
raise capital through the issuance and sale of debt securities, as well as other
depository  institutions  such as thrift and loan  companies and credit  unions,
also  provide  competition  for  the  Subsidiary  Banks  in the  acquisition  of
deposits.  The  Subsidiary  Banks also compete with money market funds and other
money market instruments which are not subject to interest rate ceilings.

         From time to time,  legislation  is proposed  or enacted  which has the
effect of increasing the cost of doing business, limiting permissible activities
or  affecting  the  competitive   balance  between  banks  and  other  financial
institutions. It is impossible to predict the competitive impact these and other
changes  in  legislation  will have on  commercial  banking in general or on the
business of the Subsidiary Banks in particular.


                                       7
<PAGE>

SUPERVISION AND REGULATION

The Effect of Governmental Policy on Banking

         The  earnings  and growth of the Company and the  Subsidiary  Banks are
affected not only by local market area factors and general economic  conditions,
but also by government monetary and fiscal policies.  For example,  the Board of
Governors of the Federal  Reserve  System (the "FRB")  influences  the supply of
money through its open market  operations  in U.S.  Government  securities,  and
adjustments  to the  discount  rates  applicable  to  borrowings  by  depository
institutions and others. Such actions influence the growth of loans, investments
and  deposits  and also  effect  interest  rates  charged  on loans  and paid on
deposits.  The  nature  and impact of future  changes  in such  policies  on the
business  and  earnings  of the  Company  and the  Subsidiary  Banks  cannot  be
predicted.

         As a  consequence  of the extensive  regulation  of commercial  banking
activities  in the United  States,  the business of the Company is  particularly
susceptible  to  federal  and state  legislation  which  may have the  effect of
increasing  or  decreasing  the cost of doing  business,  modifying  permissible
activities,   or  enhancing  the   competitive   position  of  other   financial
institutions.  Any change in applicable  laws or regulations may have a material
adverse effect on the business and prospects of the Company.

Regulation and Supervision of Bank Holding Companies

         The  Company is a bank  holding  company  subject  to the Bank  Holding
Company Act of 1956,  as amended  ("BHCA").  The Company  reports to,  registers
with,  and may be examined by the FRB. The FRB also has the authority to examine
the Company's subsidiaries.

         The FRB requires the Company to maintain certain levels of capital. See
"Capital  Standards"  herein. The FRB also has the authority to take enforcement
action  against  any bank  holding  company  that  commits any unsafe or unsound
practice,  or violates  certain  laws,  regulations,  or  conditions  imposed in
writing by the FRB.

           Under the BHCA, a company generally must obtain the prior approval of
the FRB before it exercises a controlling  influence over, or acquires  directly
or  indirectly,  more than 5% of the voting shares or  substantially  all of the
assets of any bank or bank  holding  company.  Thus,  the Company is required to
obtain the prior approval of the FRB before it acquires,  merges or consolidates
with any bank or bank holding company. Any company seeking to acquire,  merge or
consolidate  with the  Company  also  would be  required  to  obtain  the  FRB's
approval.

The Company is generally  prohibited under the BHCA from acquiring  ownership or
control of more than 5% of the voting  shares of any company  that is not a bank
or bank holding  company and from engaging  directly or indirectly in activities
other than banking,  managing banks, or providing  services to affiliates of the
holding  company.  A bank  holding  company,  with the  approval of the FRB, may
engage,  or acquire the voting shares of companies  engaged,  in activities that
the FRB has  determined  to be so closely  related to  banking  or  managing  or
controlling  banks as to be a proper  incident  thereto.  A bank holding company
must demonstrate  that the benefits to the public of the proposed  activity will
outweigh the possible adverse effects associated with such activity.

                                       8
<PAGE>

         Legislation  is  pending in  Congress  that  would  repeal the  current
statutory  restrictions on affiliations  between commercial banks and securities
firms. Under the proposed  legislation,  bank holding companies would be allowed
to control both a commercial bank and a securities affiliate, which could engage
in  the  full  range  of  investment  banking  activities,  including  corporate
underwriting.  The likelihood of such legislative changes and the impact of such
changes  might have on the Company and the  Subsidiary  Banks are  impossible to
predict.

         The FRB generally  prohibits a bank holding  company from  declaring or
paying a cash dividend  which would impose undue  pressure on the capital of the
Subsidiary Banks or would be funded only through borrowing or other arrangements
that might adversely affect a bank holding  company's  financial  position.  The
FRB's  policy is that a bank  holding  company  should not continue its existing
rate of cash  dividends on its common stock unless its net income is  sufficient
to fully fund each  dividend  and its  prospective  rate of  earnings  retention
appears  consistent with its capital needs,  asset quality and overall financial
condition.

         Transactions  between  the  Company  and the  Subsidiary  Banks and any
future subsidiaries are subject to a number of other restrictions.  FRB policies
forbid  the  payment  by  bank   subsidiaries   of  management  fees  which  are
unreasonable in amount or exceed the fair market value of the services  rendered
(or, if no market exists, actual costs plus a reasonable profit).  Additionally,
a bank holding  company and its  subsidiaries  are  prohibited  from engaging in
certain tie-in  arrangements in connection with the extension of credit, sale or
lease of property,  or furnishing of services.  Subject to certain  limitations,
depository institution  subsidiaries of bank holding companies may extend credit
to, invest in the  securities  of,  purchase  assets from, or issue a guarantee,
acceptance,  or letter of credit on behalf of, an  affiliate,  provided that the
aggregate of such transactions with affiliates may not exceed 10% of the capital
stock and surplus of the  institution,  and the  aggregate of such  transactions
with all  affiliates may not exceed 20% of the capital stock and surplus of such
institution.   The  Company  may  only   borrow  from   depository   institution
subsidiaries if the loan is secured by marketable  obligations with a value of a
designated  amount in excess of the loan.  Further,  the  Company may not sell a
low-quality asset to a depository institution subsidiary.

Bank Regulation and Supervision

         As national banks, the Subsidiary  Banks are regulated,  supervised and
regularly  examined by the OCC.  Deposit  accounts at the  Subsidiary  Banks are
insured by the Bank Insurance Fund ("BIF"),  as administered by the FDIC, to the
maximum  amount  permitted  by law.  The  Subsidiary  Banks are also  subject to
applicable  provisions of California law,  insofar as such provisions are not in
conflict with or preempted by federal banking law.

Capital Standards

          The OCC and other federal  banking  agencies have  risk-based  capital
adequacy  guidelines  intended  to provide a measure of  capital  adequacy  that
reflects the degree of risk associated with a banking organization's  operations
for both transactions  reported on the balance sheet as assets and transactions,
such as letters of credit  and  recourse  arrangements,  which are  reported  as
off-balance  sheet items.  Under these  guidelines,  nominal  dollar  amounts of
assets and credit  equivalent  amounts of off balance sheet


                                       9
<PAGE>

items are multiplied by one of several risk adjustment percentages,  which range
from 0% for  assets  with low  credit  risk,  such as  certain  U.S.  government
securities,  to 100% for assets with  relatively  higher  credit  risk,  such as
business loans.

         A banking  organization's  risk-based  capital  ratios are  obtained by
dividing  its  qualifying   capital  by  its  total  risk  adjusted  assets  and
off-balance  sheet items.  The federal banking  agencies  measure  risk-adjusted
assets and off-balance  sheet items against both total  qualifying  capital (the
sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital.
Tier 1  capital  consists  of common  stock,  retained  earnings,  noncumulative
perpetual preferred stock and minority interests in certain  subsidiaries,  less
most other intangible assets.  Tier 2 capital may consist of a limited amount of
the allowance  for possible loan and lease losses and certain other  instruments
with some characteristics of equity. The inclusion of elements of Tier 2 capital
are subject to certain other requirements and limitations of the federal banking
agencies.  Since December 31, 1992, the federal banking agencies have required a
minimum  ratio  of  qualifying  total  capital  to   risk-adjusted   assets  and
off-balance  sheet  items  of 8%,  and a  minimum  ratio  of Tier 1  capital  to
risk-adjusted assets and off-balance sheet items of 4%.

         In addition to the  risk-based  guidelines,  federal  banking  agencies
require banking  organizations to maintain a minimum amount of Tier 1 capital to
total  assets,  referred to as the leverage  ratio.  For a banking  organization
rated in the highest of the five  categories  used by regulators to rate banking
organizations,  the minimum  leverage ratio of Tier 1 capital to total assets is
3%. It is  improbable,  however,  that an  institution  with a 3% leverage ratio
would  receive  the  highest  rating  since  a  strong  capital  position  is  a
significant part of the rating.  For all banking  organizations not rated in the
highest category, the minimum leverage ratio is at least 100 to 200 basis points
above the 3% minimum.  Thus,  the  effective  minimum  leverage  ratio,  for all
practical  purposes,  is at  least  4% to  5%.  In  addition  to  these  uniform
risk-based  capital  guidelines  and  leverage  ratios  that  apply  across  the
industry,  the federal  banking  agencies have the  discretion to set individual
minimum capital  requirements for specific  institutions at rates  significantly
above the minimum guidelines and ratios.
<TABLE>

The  following  tables  present  the  capital  ratios  for the  Company  and the
Subsidiary Banks as of December 31, 1997.
<CAPTION>
                                             The Company                     South Valley                First National
                                       Amount           Ratio          Amount           Ratio         Amount          Ratio
------------------------------- -------------- --------------- --------------- --------------- -------------- --------------
                                      (000's)                         (000's)                        (000's)
<S>                                   <C>              <C>            <C>              <C>           <C>             <C>
Risk-Based Capital Ratio:
   Tier 1 Capital                     $68,925          13.58%         $17,592          11.71%        $44,601         12.81%
   Minimum Requirement                 20,295           4.00%           6,009           4.00%         13,929          4.00%
      Excess                           48,630           9.58%          11,583           7.71%         30,672          8.81%
                                       ======           =====          ======           =====         ======          =====
   Total Capital                       73,191          14.43%          19,337          12.87%         47,116         13.53%
   Minimum Requirement                 40,589           8.00%          12,017           8.00%         27,858          8.00%
      Excess                           32,602           6.43%           7,320           4.87%         19,258          5.53%
                                       ======           =====           =====           =====         ======          =====
Risk-Adjusted Assets                 $507,363                        $150,216                       $348,220
</TABLE>

                                       10
<PAGE>
<TABLE>
<CAPTION>
                                                 The Company                    South Valley                   First National
                                            Amount          Ratio          Amount           Ratio          Amount           Ratio
----------------------------------- --------------- -------------- --------------- --------------- --------------- ---------------
                                           (000's)                        (000's)                         (000's)
<S>                                        <C>              <C>          <C>                <C>          <C>                <C>

Leverage Ratio:
   Tier 1 Capital                          $68,925          9.17%         $17,592           8.03%         $44,601           8.49%
   Minimum Requirement                      30,058          4.00%           8,767           4.00%          21,014           4.00%
      Excess                                38,867          5.17%           8,825           4.03%          23,587           4.49%
                                            ======          =====           =====           =====          ======           =====
Total Average Quarterly Assets            $751,439                       $219,168                        $525,357
</TABLE>

Restrictions on Dividends and Other Distributions

         The  power  of  the  board  of  directors  of  an  insured   depository
institution  to declare a cash  dividend or other  distribution  with respect to
capital is subject to  statutory  and  regulatory  restrictions  which limit the
amount available for such  distribution  depending upon the earnings,  financial
condition  and  cash  needs  of the  institution,  as well as  general  business
conditions.  Federal law prohibits insured  depository  institutions from paying
management fees to any controlling  persons or, with certain limited exceptions,
making capital distributions,  including dividends,  if, after such transaction,
the institution would be undercapitalized.

         The payment of dividends by a national  bank is further  restricted  by
additional  provisions  of federal  law,  which  prohibits a national  bank from
declaring  a dividend  on its shares of common  stock  unless its  surplus  fund
exceeds the amount of its common capital (total  outstanding common shares times
the par  value  per  share).  Additionally,  if  losses  have at any  time  been
sustained  equal to or exceeding a bank's  undivided  profits  then on hand,  no
dividend  can be paid.  Moreover,  even if a bank's  surplus  exceeds its common
capital and its undivided profits exceed its losses,  the approval of the OCC is
required for the payment of dividends if the total of all dividends  declared by
a national  bank in any calendar  year would exceed the total of its net profits
of that year combined with its retained net profits of the two preceding  years,
less any  required  transfers  to  surplus or a fund for the  retirement  of any
preferred  stock.  A  national  bank must  consider  other  business  factors in
determining  the payment of  dividends.  The payment of dividends by the Bank is
governed by the Bank's ability to maintain  minimum  required capital levels and
an adequate  allowance for loan losses.  The federal banking  agencies also have
the  authority to prohibit a depository  institution  from  engaging in business
practices,  which are  considered  to be unsafe or unsound,  possibly  including
payments of dividends or other payments under certain circumstances even if such
payments are not expressly prohibited by statute.

         The  Company has paid a stock  dividend  every year since 1986 and cash
dividends were paid in 1993, 1994, 1995, 1996 and 1997.

                                       11
<PAGE>

Premiums for Deposit Insurance and Assessments for Examinations

         As an insured  depository  institution,  the Company is required to pay
premiums  for  FDIC  deposit  insurance.  The  FDIC  has  adopted  a  risk-based
assessment system for deposit insurance premiums. Under this system,  depository
institutions  were charged  anywhere from 23 cents to 31 cents for every $100 in
insured  deposits based on that  institution's  capital  levels and  supervisory
subgroup assignment.

         In May 1995,  the BIF achieved its target goal of bringing the ratio of
insurance  fund  reserves to $1.25 for each $100 of insured  deposits.  Based on
this  reserve  level,  the FDIC in November  1995 reduced the range of insurance
assessment  rates  from  $0.04  to $0.31  to $0 to  $0.31  per  $100 in  insured
deposits.  Due  to  these  changes  in  assessment  rates,  the  Company's  FDIC
assessment  expense  decreased  for 1995 by $316,000 or 94.6%.  During  1996,  a
special one-time  assessment was paid by BIF-insured  financial  institutions to
the FDIC for the purpose of  assisting  in the  recapitalization  of the Savings
Association  Insurance Fund (the "SAIF"). The SAIF is the insurance fund reserve
for savings  institutions.  In November 1996, the Subsidiary  Banks paid $71,000
for this special  assessment.  During 1997, the FDIC assessment  expense for the
Subsidiary Banks was $68,000.

Interstate Banking and Branching

         The Riegle-Neal  Interstate  Banking and Branching  Efficiency Act (the
"Act"),  which was enacted in 1994,  codifies the  authority of banks to provide
specified  interstate  banking  services  on an  agency  basis to  customers  of
affiliate banks as of September 1995. Also, under the Act, as of September 1995,
bank holding  companies may acquire  banks in other  states,  subject to certain
deposit  concentration  limitations.  Beginning  June 1,  1997,  and  subject to
certain deposit concentration and other limitations,  banks may merge with other
banks in states  that do not "opt out" of the  interstate  legislation  prior to
June 1,  1997.  Interstate  mergers  may be  conducted  prior to June 1, 1997 in
states that  specifically  permit such  mergers.  In addition,  prior to June 1,
1997, certain consolidations are possible using the "30-mile rule," which allows
national banks to relocate  their  headquarters  up to 30 miles away,  including
across state lines.  Currently,  several  states have already  "opted in" to the
interstate legislation.  Effective October 2, 1996, California opted in early to
interstate  branching by  permitting  other  state's  banks to acquire an entire
California  bank  by  merger  or  purchase  and  thereby  establish  one or more
California  branch offices,  provided the acquired bank has been in existence at
least five years.  The effect of these laws on the  Company  and the  Subsidiary
Banks cannot be determined.

ITEM 2   PROPERTIES

         On December 31, 1997, the Company had 11 offices, of which 4 were owned
and 7 were leased by the Company or its Subsidiary  Banks.  All of these offices
are considered by management to be well  maintained and adequate for the purpose
intended.  See page 23 of the Annual Report incorporated herein by reference for
further information on leases.


                                       12
<PAGE>

ITEM 3   LEGAL PROCEEDINGS

          Neither the Company nor its Subsidiary Banks is a party to, nor is any
of their property the subject of, any material pending legal  proceedings  other
than ordinary routine litigation incidental to their respective businesses.

ITEM 4   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          No  matters  were  submitted  to a  vote  by the  Shareholders  of the
Company's Common Stock during the fourth quarter of 1997.

                                     PART II

ITEM 5   MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

         For  information  concerning  the  Company's  common  stock and related
security holder matters, see "Pacific Capital Bancorp Stock Activity" at Page 45
of the Annual Report, which is incorporated herein by reference. For information
regarding  dividends,  see  "Restrictions on Dividends and other  Distributions"
under Part I, Item 1 of this Form 10-K on page 13.

         As of March  31,  1997,  there  were  1,874  holders  of  record of the
Company's common stock.

ITEM 6   SELECTED FINANCIAL DATA

         For selected  financial  data  concerning  the Company,  see  "Selected
Financial  Information  and  Comparative Per Share Data" at Page 1 of the Annual
Report, which is incorporated herein by reference.

ITEM 7   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         For  management's  discussion  and analysis of financial  condition and
results of operations,  see  "Management's  Discussion and Analysis" at Pages 22
through  45 of  the  Annual  Report,  which  pages  of  the  Annual  Report  are
incorporated herein by reference.

ITEM 7A  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 is  reviewed on a regular  basis by the

                                       13
<PAGE>

Asset/Liability  Committee.  Tools used by  management  include a  modified  GAP
report and an  asset/liability  simulation model.  Management  believes that the
Company's  market risk and interest  rate risk  profiles  are within  reasonable
tolerances at this time.

         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.


        The following table  represents the change in the Company's Market Value
of  Portfolio  Equity  (MVPE) at December  31, 1997 in the event of a sudden and
sustained  change in interest  rates as  presented.  MVPE is defined as the fair
value of assets less the fair value of liabilities on the Company's consolidated
balance sheet.


(Dollars in thousands)         Market Value of
Change in interest rates      Portfolio Equity         $ Change        % Change
--------------------------------------------------------------------------------
200 Basis points rise                  $90,811             $755           0.84%
100 Basis points rise                   90,434              378           0.42%
Base scenario                           90,056                -           0.00%
100 Basis points decline                88,950          (1,107)         (1.23%)
200 Basis points decline                87,873          (2,213)         (2.46%)



ITEM 8   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         For financial  statements of the Company, see Pages 2 through 26 of the
Annual Report and the  "Independent  Auditors"  Report  thereon at Page 49 which
pages of the Annual Report are incorporated herein by reference.


ITEM 9   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         Not applicable.

                                       14
<PAGE>

                                    PART III

ITEM 10  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information Concerning Directors and Executive Officers

         For  information  concerning  directors and  executive  officers of the
Company,  see  "ELECTION OF DIRECTORS  OF THE COMPANY" in the  definitive  Proxy
Statement  for the Company's  1997 Annual  Meeting of  Shareholders  (the "Proxy
Statement"), which is incorporated herein by reference.

Compliance With Section 16(a) of the Securities Exchange Act of 1934

         Section  16(a) of the  Securities  Exchange  Act of 1934  requires  the
Company's officers and directors,  and any persons who own more than ten percent
of a registered  class of the Company's  equity  securities,  to file reports of
ownership and changes in ownership with the Securities and Exchange  Commission.
Officers,  directors and greater than  ten-percent  shareholders are required by
SEC  regulation  to furnish the Company  with copies of all Section  16(a) forms
they file.  To the best  knowledge of the Company,  there are no persons who own
more than ten-percent of the Company's Common Stock.

         Based solely on its review of the copies of such forms  received by it,
or written  representations  from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, for the fiscal year ended
December  31,  1997,  all filing  requirements  applicable  to its  officers and
directors have been satisfied.

ITEM 11  EXECUTIVE COMPENSATION

        For  information  concerning  executive  compensation,   see  "EXECUTIVE
COMPENSATION" in the Proxy Statement, which is incorporated herein by reference.

ITEM 12  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         For information  concerning  security  ownership of certain  beneficial
owners and management,  see "PRINCIPAL  SHAREHOLDERS" and "ELECTION OF DIRECTORS
OF THE  COMPANY"  in the  Proxy  Statement,  which  is  incorporated  herein  by
reference.

ITEM 13  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         For   information   concerning   certain   relationships   and  related
transactions,   see  "CERTAIN   RELATIONSHIPS  AND  RELATED   TRANSACTIONS"  and
"INDEBTEDNESS  OF  MANAGEMENT"  in the Proxy  Statement,  which is  incorporated
herein by reference.

                                       15
<PAGE>

                                     PART IV

ITEM 14  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)      1.       Financial Statements.

         The  consolidated  financial  statements of Pacific Capital Bancorp and
subsidiaries,  other financial  information and the Independent Auditors' Report
on Consolidated  Financial Statements appearing at the indicated location in the
Annual Report are incorporated by reference into this report.

         2.       Financial Statement Schedules.

         In accordance with Regulation  S-X, the financial  statement  schedules
have been  omitted  because  (a) they are not  applicable  to or required of the
Company;  or (b)  the  information  required  is  included  in the  consolidated
financial statements or notes thereto.

         With  the  exception  of such  information  in the 1997  Annual  Report
incorporated  herein by reference,  the 1997 Annual Report is not deemed "filed"
as part of this report.

         3.       Exhibits.

         See Index to Exhibits at pages 69 - 73 of this Form 10-K.

(b)      Reports on Form 8-K.

         None


                                       16
<PAGE>


                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

                        Consolidated Financial Statements

                        December 31, 1997, 1996, and 1995

                   (With Independent Auditors' Report Thereon)




                                       17
<PAGE>
<TABLE>

                                         PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
                                            SELECTED FINANCIAL INFORMATION AND
                                                COMPARATIVE PER SHARE DATA
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)            1997         1996         1995          1994          1993
-------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>          <C>           <C>           <C>           <C>
RESULTS OF OPERATIONS:
Interest income                                          $  53,215    $  43,958     $  38,678     $  33,030     $  29,346
Interest expense                                            17,385       13,319        10,971         8,074         7,763
Net interest income                                         35,830       30,639        27,707        24,956        21,583
Provision for possible loan losses                           1,520          685           527           479         1,278
-------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
   for possible loan losses                                 34,310       29,954        27,180        24,477        20,305
Other income                                                 3,345        3,206         3,056         2,888         2,911
Other expense                                               20,884       22,727        19,352        17,345        16,445
Net gain (loss) on securities transactions                      11          (46)          (73)          (17)          120
-------------------------------------------------------------------------------------------------------------------------
Income before income taxes                                  16,782       10,387        10,811        10,003         6,891
Income taxes                                                 6,635        4,348         4,200         3,778         2,426
-------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
    Accounting change                                       10,147        6,039         6,611         6,225         4,465
Cumulative effect of accounting change                        --           --            --            --             549
-------------------------------------------------------------------------------------------------------------------------
Net income                                               $  10,147    $   6,039     $   6,611     $   6,225     $   5,014
-------------------------------------------------------------------------------------------------------------------------

PER SHARE DATA
Income before cumulative effect of
   Accounting change - diluted                           $    2.28    $    1.36     $    1.50     $    1.44     $    1.03
Net income - diluted                                          2.28         1.36          1.50          1.44          1.15
Cash dividends                                                0.66         0.60          0.53          0.40          0.30
Book value                                                   16.90        15.59         15.54         14.60         13.83

BALANCES AT YEAR END
Total assets                                               764,719      619,439       530,852       487,749       436,958
Total loans                                                419,293      388,728       300,895       290,352       265,903
Total deposits                                             683,398      547,182       465,508       427,870       382,475
Total shareholders' equity                                  72,558       63,646        60,533        55,002        50,039

AVERAGE DAILY BALANCES
Total assets                                               677,491      568,686       496,007       459,695       433,558
Total loans                                                411,546      332,421       290,265       277,263       259,131
Total deposits                                             604,953      501,833       431,975       404,047       382,183
Total shareholders' equity                                  68,353       63,106        58,183        52,719        48,205

PERFORMANCE AND CAPITAL RATIOS
Return on average assets                                      1.50%        1.06%         1.33%         1.35%         1.16%
Return on average shareholders' equity                       14.84%        9.57%        11.36%        11.81%        10.40%
Average shareholders' equity to average assets               10.09%       11.10%        11.73%        11.47%        11.12%
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       18
<PAGE>
<TABLE>
<CAPTION>
                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

December 31,
---------------------------------------------------------------------------------------------------
(In thousands, except share amounts)                                           1997         1996
---------------------------------------------------------------------------------------------------
<S>                                                                          <C>         <C>
Assets
Cash and due from banks                                                      $  49,982   $  48,126
Federal funds sold                                                              26,405      14,910
Money market funds                                                               2,132      13,209
---------------------------------------------------------------------------------------------------
      Cash and cash equivalents                                                 78,519      76,245

Investment securities:
    Held-to-maturity, at amortized cost
       (fair value of $7,347 and $9,741, respectively)                           7,347       9,680
    Available-for-sale, at fair value                                          220,984     116,528
---------------------------------------------------------------------------------------------------
     Total investment securities                                               228,331     126,208

Loans available for sale                                                        10,523       5,821

Loans, net of unearned income                                                  419,293     388,728
Less allowance for possible loan losses                                          4,266       3,672
---------------------------------------------------------------------------------------------------
     Net loans                                                                 415,027     385,056

Premises and equipment, net                                                     15,331      15,300
Accrued interest receivable and other assets                                    16,988      10,809
---------------------------------------------------------------------------------------------------
     Total assets                                                            $ 764,719   $ 619,439
===================================================================================================

Liabilities and Shareholders' Equity

Deposits:
  Demand, noninterest bearing                                                $ 174,649   $ 131,332
  Demand, interest bearing                                                      97,322      84,770
  Savings and money market                                                     173,151     164,890
  Time certificates                                                            238,276     166,190
---------------------------------------------------------------------------------------------------
     Total deposits                                                            683,398     547,182

Accrued interest payable and other liabilities                                   8,763       8,611
---------------------------------------------------------------------------------------------------
     Total liabilities                                                         692,161     555,793
---------------------------------------------------------------------------------------------------
Shareholders'  equity:
  Preferred stock; no par value, 20,000,000 shares authorized and unissued        --          --
  Common stock; no par value, 20,000,000 shares authorized: 4,294,403
    and 4,083,363 shares issued and outstanding in 1997 and 1996,
    respectively                                                                58,434      49,388
  Retained earnings                                                             12,852      14,423
  Net unrealized gain (loss) on available-for-sale securities                    1,272        (165)
---------------------------------------------------------------------------------------------------
     Total shareholders' equity                                                 72,558      63,646

Commitments and contingencies                                                     --          --
---------------------------------------------------------------------------------------------------
     Total liabilities and shareholders' equity                              $ 764,719   $ 619,439
===================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>

                                       19
<PAGE>
<TABLE>

                                         PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
                                             CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Years ended December 31,
--------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)                                 1997          1996           1995
--------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>           <C>            <C>
Interest income:
  Interest and fees on loans                                         $    40,843   $    33,845    $    30,490
  Interest on federal funds sold                                           2,482         1,806          1,870
  Interest on investment securities:
     Taxable                                                               9,239         7,557          5,415
     Non-taxable                                                             651           750            903
--------------------------------------------------------------------------------------------------------------
      Total interest income                                               53,215        43,958         38,678
--------------------------------------------------------------------------------------------------------------
Interest expense:
  Interest on deposits                                                    17,356        13,292         10,922
  Other interest expense                                                      29            27             49
--------------------------------------------------------------------------------------------------------------
     Total interest expense                                               17,385        13,319         10,971
--------------------------------------------------------------------------------------------------------------
     Net interest income                                                  35,830        30,639         27,707
Provision for possible loan losses                                         1,520           685            527
--------------------------------------------------------------------------------------------------------------
      Net interest income after provision for possible loan losses        34,310        29,954         27,180
--------------------------------------------------------------------------------------------------------------
Other income:
  Service charges                                                          2,619         2,432          2,399
  Gain on sale of loans                                                       22            27             91
  Net gains (losses) on securities transactions                               11           (46)           (73)
  Other                                                                      704           747            566
--------------------------------------------------------------------------------------------------------------
      Total other income                                                   3,356         3,160          2,983
--------------------------------------------------------------------------------------------------------------
Other expenses:
  Salaries and benefits                                                   11,315        11,864          9,989
  Occupancy                                                                2,326         2,111          1,959
  Equipment                                                                1,755         2,577          1,943
  Advertising and promotion                                                  864           710            659
  Stationery and supplies                                                    767           563            508
  Legal and professional fees                                              1,185         1,946            823
  Regulatory assessments                                                     222           147            572
  Other                                                                    2,450         2,809          2,899
--------------------------------------------------------------------------------------------------------------
    Total other expenses                                                  20,884        22,727         19,352
--------------------------------------------------------------------------------------------------------------
      Income before income taxes                                          16,782        10,387         10,811
Income taxes                                                               6,635         4,348          4,200
--------------------------------------------------------------------------------------------------------------
 Net income                                                          $    10,147   $     6,039    $     6,611
==============================================================================================================
Earnings per share                                                   $      2.36   $      1.41    $      1.55
==============================================================================================================
Diluted earnings per share                                           $      2.28   $      1.36    $      1.50
==============================================================================================================

Weighted average shares outstanding                                    4,297,832     4,297,017      4,271,445
Dilutive effect of stock options                                         149,456       154,581        130,467
--------------------------------------------------------------------------------------------------------------
Total weighted average diluted shares outstanding                      4,447,288     4,451,598      4,401,912
==============================================================================================================
<FN>

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

                                       20
<PAGE>
<TABLE>
                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

---------------------------------------------------------------------------------------------------------
December 31, 1997, 1996, and 1995
---------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                            Net unrealized
                                                                            gain (loss) on         Total
                                           Common Stock          Retained   available-for-  shareholders'
(In thousands, except share amounts)   Shares       Amount       earnings   sale securities       Equity
---------------------------------------------------------------------------------------------------------
<S>                                  <C>          <C>           <C>           <C>           <C>
Balances, December 31, 1994          3,767,702    $   41,182    $   14,026    $     (206)   $   55,002
Net income for the year                   --            --           6,611          --           6,611
Purchase and retirement of shares       (5,606)         (111)         --            --            (111)
Exercise of stock options                9,590           158          --            --             158
5% stock dividend, including
   payment of fractional shares        123,338         3,132        (3,147)         --             (15)
Cash dividends declared                   --            --          (1,684)         --          (1,684)
Net unrealized gain on
   available-for-sale securities          --            --            --             572           572
---------------------------------------------------------------------------------------------------------
Balances, December 31, 1995          3,895,024        44,361        15,806           366        60,533
Net income for the year                   --            --           6,039          --           6,039
Purchase and retirement of shares      (23,646)         (605)         --            (605)
---------------------------------------------------------------------------------------------------------
Exercise of stock options               17,981           295          --            --             295
5% stock dividend, including
   payment of fractional shares        194,455         5,348        (5,372)         --             (24)
Cash dividends declared                   --            --          (2,050)         --          (2,050)
Repurchase of dissenter shares            (451)          (11)         --            --             (11)
Net unrealized loss on
  available-for-sale securities           --            --            (531)         (531)
---------------------------------------------------------------------------------------------------------
Balances, December 31, 1996          4,083,363        49,388        14,423          (165)       63,646
Net income for the year                   --            --          10,147          --          10,147
Purchase and retirement of shares      (10,000)         (410)         --            --            (410)
Exercise of stock options               17,436           456          --            --             456
5% stock dividend, including
   Payment of fractional shares        203,404         9,000        (9,040)         --             (40)
Cash dividend declared                    --            --          (2,678)         --          (2,678)
Net unrealized gain on
   available-for-sale securities          --            --            --           1,437         1,437
---------------------------------------------------------------------------------------------------------
Balances, December 31, 1997          4,294,203    $   58,434    $   12,852    $    1,272    $   72,558
=========================================================================================================
<FN>

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

                                       21
<PAGE>
<TABLE>

                                         PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years ended December 31,
---------------------------------------------------------------------------------------------------------------------
(In thousands)                                                                      1997          1996         1995
---------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>          <C>          <C>
Cash flows from operating activities:
  Net income                                                                      $  10,147    $   6,039    $   6,611
  Adjustments to reconcile net income to net cash
   provided by operating activities:
    Depreciation and amortization                                                     1,478        1,074        1,260
    Provision for possible loan losses                                                1,520          685          527
    (Gain) loss on investment securities transactions                                   (11)          46           73
    Net originations of loans available for sale                                     (4,702)      (1,945)      (2,891)
    Proceeds from sale of loans                                                        --           --            924
    Gain on sale of loans                                                               (22)         (27)         (91)
    Deferral of loan origination fees                                                   150          (64)          40
    Change in accrued interest receivable and other assets                           (4,742)        (118)        (837)
    Change in accrued interest payable and other liabilities                            185        3,813           93
---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                             4,003        9,503        5,709
---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
  Net change in loans                                                               (31,858)     (88,839)     (11,003)
  Recoveries on loans                                                                   217          347          264
  Maturities of investment securities                                                27,146       20,445       40,818
  Purchases of investment securities                                               (129,269)     (82,606)     (95,070)
  Proceeds from sale of available-for-sale securities                                  --         61,735       42,089
  Capital expenditures, net                                                          (1,509)      (2,867)      (1,536)
---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                              (135,273)     (91,785)     (24,438)
---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
  Net increase in deposits                                                          111,522       81,677       21,471
  Cash received in connection with branch acquisition                                24,694         --         16,167
  Cash paid for retirement of stock                                                    (410)        (605)        (111)
  Proceeds from exercise of stock options                                               456          295          158
  Cash paid in lieu of fractional shares                                                (40)         (24)         (15)
  Cash paid for dividends                                                            (2,678)      (2,050)      (1,684)
---------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                           133,544       79,293       35,986
---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                                  2,274       (2,989)      17,257
Cash and cash equivalents at beginning of year                                       76,245       79,234       61,977
---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                          $  78,519    $  76,245    $  79,234
=====================================================================================================================
Supplemental disclosures of cash flow information:
  Cash paid during the period:
     Interest                                                                     $  18,188    $  14,379    $  11,827
     Income taxes                                                                     6,040        4,834        4,107
=====================================================================================================================
Noncash investing and financing activities:
    Transfer from retained earnings to common stock due to
      Stock dividends                                                             $   9,000    $   5,348    $   3,132
    Transfer of securities from held-to-maturity
      to available-for-sale                                                            --           --         38,660
    Transfer from loans to other real estate owned                                     --            352        1,940
=====================================================================================================================
<FN>

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

                                       22
<PAGE>

                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



                                December 31, 1997


(1)      Summary of Significant Accounting Policies

         The accounting  policies of Pacific  Capital  Bancorp and  subsidiaries
         (the  Company) are in accordance  with  generally  accepted  accounting
         principles  and  conform  to  general   practices  within  the  banking
         industry.

         The Company - Pacific Capital Bancorp is a California corporation and a
         multi-bank holding company, which was incorporated on January 26, 1983.
         The Company's  subsidiaries,  First National Bank of Central California
         (First  National),  and South  Valley  National  Bank  (South  Valley),
         collectively (Subsidiary Banks), commenced operations in 1984 and 1983,
         respectively.  First National is a full service commercial bank serving
         Monterey, Salinas, Carmel, Watsonville, Prunedale and surrounding areas
         in Monterey  and Santa Cruz  Counties.  South  Valley is a full service
         commercial  bank  serving  Morgan  Hill,  Gilroy,  Hollister,  San Juan
         Bautista and surrounding areas in Santa Clara and San Benito Counties.

         Consolidation  - The  accompanying  consolidated  financial  statements
         include  the effect of the fourth  quarter  1996  acquisition  of South
         Valley    Bancorporation    which    was    accounted    for    as    a
         pooling-of-interests.  These financial  statements include the accounts
         of Pacific Capital Bancorp and its subsidiaries, First National Bank of
         Central  California and South Valley  National Bank.  Accordingly,  the
         financial information included in the consolidated financial statements
         and notes  thereto,  present  the  combined  results of  operations  of
         Pacific  Capital  Bancorp  and South  Valley  Bancorporation  as if the
         merger had been in effect for all periods  presented.  All  significant
         intercompany balances and transactions have been eliminated.

         Use  of  Estimates  -  The  preparation  of  financial   statements  in
         conformity  with  generally  accepted  accounting  principles  requires
         management to make estimates and  assumptions  that affect the reported
         amounts of assets and liabilities  and disclosure of contingent  assets
         and  liabilities  at the  date  of the  financial  statements  and  the
         reported amounts of revenues and expenses during the reporting  period.
         Actual results could differ from those estimates.

         Cash and Cash  Equivalents - Cash and cash  equivalents  as reported in
         the  consolidated  statements of cash flows includes cash on hand, cash
         balances due from banks,  federal


                                       23
<PAGE>
                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         funds sold,  and money market mutual funds.  The cash  equivalents  are
         readily convertible to known cash within 90 days.

         Investment  Securities - The Company has  classified its securities for
         which it has the  positive  intent and  ability to hold to  maturity as
         held-to-maturity  securities. Such securities are reported at amortized
         cost. The Company has classified  certain  securities for which it does
         not  have  the  intent  to hold to  maturity  and  which  are not  held
         principally  for  the  purpose  of  selling  them in the  near  term as
         available-for-sale  securities.  Such  securities  are reported at fair
         value, with unrealized gains and losses, net of income taxes,  reported
         in a separate  component of shareholders'  equity. The Company does not
         engage in trading activities.

         Amortization  of  premiums  and  accretion  of  discounts   arising  at
         acquisition  of  investment  securities  are  included in income  using
         methods that approximate the level yield method. Gains or losses on the
         sale of securities are determined based on the specific  identification
         method.

         In November  1995,  the  Financial  Accounting  Standards  Board (FASB)
         issued a special  report,  A Guide to  Implementation  of Statement No.
         115,  on  Accounting  for  Certain   Investments  in  Debt  and  Equity
         Securities  Questions and Answers,  (the Special  Report).  The Special
         Report  allowed  companies  to  reassess  the  appropriateness  of  the
         classifications  of all  securities  held and account for any resulting
         reclassifications at fair value.  Reclassifications  from this one-time
         reassessment will not call into question the intent of an enterprise to
         hold other debt  securities  to maturity in the future,  provided  that
         reclassification  was  performed  by  December  31,  1995.  The Company
         adopted the  reclassification  provision in the Special  Report  during
         1995 and transferred  $38,660,000 of  held-to-maturity  securities into
         available-for-sale.

         Loans - Loans are stated at the principal amount outstanding.  Interest
         on  loans is  credited  to  income  on a simple  interest  basis.  Loan
         origination  fees  and  direct   origination  costs  are  deferred  and
         amortized to income by a method  approximating the level yield interest
         method  over  the  estimated  lives  of  the  underlying  loans.  Loans
         contractually  past due over 90 days or considered  impaired are placed
         on  nonaccrual  status,  unless  they are  well-secured  by  underlying
         collateral and are in the process of collection.  When a loan is placed
         on nonaccrual status, the accrued interest is reversed against interest
         income  and the  loan is  accounted  for on the  cash or cost  recovery
         method  thereafter  until  qualifying  for  return to  accrual  status.
         Generally,  a  loan  will  be  returned  to  accrual  status  when  all
         delinquent principal and interest become current in accordance with the
         terms  of the  loan  agreement  and full  collection  of the  principal
         appears probable.

                                       24
<PAGE>
                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         The allowance for possible loan losses is a valuation allowance that is
         maintained  at a level  estimated  to be adequate to provide for future
         loan losses through charges to current operating expense. The allowance
         is based upon a continuing review of loans by management which includes
         consideration  of  changes  in the  character  of the  loan  portfolio,
         current and anticipated economic  conditions,  past lending experience,
         loan loss  experience,  and such other factors which,  in  management's
         judgment,  deserve recognition in estimating  potential loan losses. In
         addition, regulatory agencies, as an integral part of their examination
         process,  periodically review the Company's allowance for possible loan
         losses. Such agencies may require the Company to recognize additions to
         the allowance based on their judgment of information  available to them
         at the time of their examination.

         Loans  Available for Sale - The Subsidiary  Banks  originate loans that
         are guaranteed in part by the Small Business  Administration (SBA). The
         guaranteed  portion of such  loans may be sold  without  recourse.  The
         Subsidiary  Banks retain the servicing and credit risk in the remaining
         unguaranteed  portion.  Loans available for sale are valued at lower of
         cost or  estimated  market  value and are  comprised  of the portion of
         loans  originated  for sale,  which  are  guaranteed  by the SBA.  When
         participating  interests in loans are sold without recourse,  gains are
         recognized  at the  time of the sale  which  are  equal to the  premium
         received less estimated  future loan servicing  costs and profits.  Any
         discounts  related  to loan  interests  retained  are  amortized  using
         methods  that  approximate  the level  yield  interest  method over the
         remaining life of the loan.

         In  1997,  the  Company  adopted  Statement  of  Financial   Accounting
         Standards  (SFAS) No. 125,  Accounting  for  Transfers and Servicing of
         Financial  Assets and  Extinguishments  of Liabilities.  This statement
         provides accounting and reporting standards for transfers and servicing
         of  financial  assets  and  extinguishments  of  liabilities  based  on
         consistent application of a financial-components  approach that focuses
         on control.  It  distinguishes  transfers of financial  assets that are
         sales from transfers that are secured borrowings.  Under this approach,
         after  a  transfer  of  financial  assets,  an  entity  recognizes  all
         financial  and  servicing  assets it controls  and  liabilities  it has
         incurred and  derecognizes  financial  assets it no longer controls and
         liabilities that have been extinguished. Upon adoption, there was not a
         material impact to the Company's consolidated financial statements.

         Premises  and  Equipment - Premises and  equipment  are stated at cost,
         less  accumulated  depreciation  and  amortization.   Depreciation  and
         amortization  are charged to expense over the estimated useful lives of
         the assets or the lease term on a straight-line basis as follows:

                                       25
<PAGE>
                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

--------------------------------------------------------------------------------
                 Buildings                                    40 years
                 Furniture and equipment                     2-5 years
                 Leasehold improvements                        5 years
                 Property under capital lease                  5 years
--------------------------------------------------------------------------------

         Other Real  Estate  Owned - Real  estate and other  assets  acquired in
         satisfaction of indebtedness  are recorded at the lower of the recorded
         loan  amount or the  estimated  fair  market  value net of  anticipated
         selling costs,  and any difference  between this and the loan amount is
         treated as a loan loss.  Costs of maintaining  other real estate owned,
         subsequent  declines in fair value, if any, and gains or losses on sale
         are reflected in current earnings.

         Income Taxes - Deferred tax assets and  liabilities  are recognized for
         the future tax  consequences  attributable  to differences  between the
         financial statement carrying amounts of existing assets and liabilities
         and their  respective tax bases.  To the extent that current  available
         evidence  about the future  raises  doubt  about the  realization  of a
         deferred tax asset, a valuation allowance is established to reduce that
         deferred  tax asset if it is more  likely than not that the related tax
         benefits will not be realized.  Deferred tax assets and liabilities are
         measured using enacted tax rates expected to apply to taxable income in
         the years which those  differences  are  expected  to be  recovered  or
         settled.  The effect on deferred tax assets and liabilities of a change
         in tax rates is  recognized  in income in the period that  includes the
         enactment date.

         Net Income Per Share - In February  1997, the FASB issued SFAS No. 128,
         Earnings Per Share. SFAS No. 128 supersedes APB Opinion No. 15 Earnings
         Per Share, and specifies the computation,  presentation, and disclosure
         requirements  for earnings per share (EPS) for entities  with  publicly
         held common  stock or  potential  common  stock.  SFAS No. 128 replaces
         Primary  EPS and Fully  Diluted  EPS with  Basic EPS and  Diluted  EPS,
         respectively.  Upon  adoption,  it also requires dual  presentation  of
         Basic EPS and  Diluted EPS on the face of the  Statement  of Income for
         all  entities   with  complex   capital   structures   and  requires  a
         reconciliation  of the  numerator  and  denominator  of the  Basic  EPS
         computation to the numerator of the Diluted EPS computation.

         Basic EPS is computed by dividing  net income by the  weighted  average
         number of shares of common stock outstanding  during the year.  Diluted
         earnings  per share is computed by dividing  net income by the weighted
         average  number of shares of common stock  outstanding  during the year
         plus shares issuable  assuming  exercise of all employee stock options,
         except where antidilutive.  Weighted average shares outstanding and all
         per share


                                       26
<PAGE>
                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         amounts included in the accompanying  consolidated financial statements
         and notes thereto have given effect to all stock dividends.

         In  February  1997,  the FASB  issued  SFAS  No.  129,  Disclosures  of
         Information  about Capital  Structure which  establishes  standards for
         disclosing  information  about an entity's capital  structure for those
         entities deemed to have complex capital structures.  This statement did
         not have a  material  impact on the  Company's  consolidated  financial
         statements.

         Dividends - In 1997 the Company paid four cash  dividends of $0.165 per
         share to shareholders of record on March 14, June 16, September 15, and
         November 17,  payable on March 31, June 30,  September 30, and December
         1, 1997, respectively.  The Company also paid a five percent (5%) stock
         dividend payable to shareholders of record as of December 1, 1997.

         Recent  Accounting  Pronouncements - In June 1997, the FASB issued SFAS
         No. 130, Reporting of Comprehensive  Income. This statement establishes
         standards  for reporting and  displaying  comprehensive  income and its
         components  in the  consolidated  financial  statements.  It does  not,
         however,  require a specific format for the statement, but requires the
         Company to display an amount  representing total  comprehensive  income
         for the period in that financial statement.  The Company will adopt the
         statement in 1998 but has not decided as to the presentation format.

         In June 1997, the FASB issued 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.

(2)      Merger

         On November 20, 1996, the Company acquired South Valley  Bancorporation
         (SVB)  and  its  banking   subsidiary,   South  Valley  National  Bank,
         headquartered in Morgan Hill,  California.  The consolidated  financial
         statements  of the Company  give  effect to the merger,  which has been
         accounted for as a pooling-of-interests.  Accordingly,  the accounts of
         SVB have been  combined with those of the Company for all prior periods
         presented.

                                       27
<PAGE>
                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(3)      Cash and Due from Banks

         Cash  and  due  from  banks  includes   approximately   $3,845,000  and
         $5,659,000 as of December 31, 1997 and 1996, respectively,  held by the
         Federal  Reserve  Bank  of  San  Francisco  to  meet  required  reserve
         balances.

(4)      Quarterly Income Statement
<TABLE>

         The  consolidated  statements of income for 1997 and 1996 by quarter is
as follows:
<CAPTION>

(Unaudited)                                                                     1997
-----------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)              4th Quarter     3rd Quarter    2nd Quarter     1st Quarter
-----------------------------------------------------------------------------------------------------------------
<S>                                                    <C>             <C>             <C>             <C>
Interest income                                        $14,547         $13,633         $13,049         $11,986
Interest expense                                         4,867           4,513           4,143           3,862
-----------------------------------------------------------------------------------------------------------------
   Net interest income                                   9,680           9,120           8,906           8,124
Provision for possible loan losses                         610             340             285             285
-----------------------------------------------------------------------------------------------------------------
   Net interest income after provision
      for possible loan losses                           9,070           8,780           8,621           7,839
Other income                                               939             813             799             805
Other expense                                            5,927           5,033           4,964           4,960
-----------------------------------------------------------------------------------------------------------------
Earnings before income taxes                             4,082           4,560           4,456           3,684
Income taxes                                             1,607           1,811           1,775           1,442
-----------------------------------------------------------------------------------------------------------------
Net income                                             $ 2,475         $ 2,749         $ 2,681         $ 2,242
=================================================================================================================
Net income per share - basic                           $  0.58         $  0.64         $  0.62         $  0.52
=================================================================================================================
Net income per share - diluted                         $  0.55         $  0.62         $  0.60         $  0.50
=================================================================================================================

(Unaudited)                                                                     1996
-----------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)              4th Quarter     3rd Quarter    2nd Quarter   1st Quarter
-----------------------------------------------------------------------------------------------------------------
Interest income                                         $11,843        $11,201        $10,626        $10,288
Interest expense                                          3,654          3,406          3,158          3,101
-----------------------------------------------------------------------------------------------------------------
   Net interest income                                    8,189          7,795          7,468          7,187
Provision for loan loss                                     500              6             74            105
-----------------------------------------------------------------------------------------------------------------
   Net interest income after provision
      for possible loan losses                            7,689          7,789          7,394          7,082
Other income                                                781            780            817            782
Other expense                                             7,270          5,584          4,962          4,911
-----------------------------------------------------------------------------------------------------------------
Earnings before income taxes                              1,200          2,985          3,249          2,953
Income taxes                                                733          1,207          1,256          1,152
-----------------------------------------------------------------------------------------------------------------
Net income                                              $   467        $ 1,778        $ 1,993        $ 1,801
=================================================================================================================
Net income per share - basic                            $  0.11        $  0.41        $  0.46        $  0.42
=================================================================================================================
Net income per share - diluted                          $  0.10        $  0.39        $  0.45        $  0.41
=================================================================================================================
</TABLE>

                                       28
<PAGE>
                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(5)      Investment Securities
<TABLE>

         The amortized cost and estimated  fair values of investment  securities
as of December 31 are as follows:
<CAPTION>
----------------------------------------------------------------------------------------------------------------
                                                                                                      Estimated
                                                     Amortized         Unrealized      Unrealized          fair
(In thousands)                                            cost               gain            loss         value
----------------------------------------------------------------------------------------------------------------
1997
----------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                 <C>             <C>            <C>
Available-for-sale securities:
   U.S. Treasury and agency                          $ 87,591            $    698        $     42       $ 88,247
   State and municipal                                  9,529                 115               2          9,642
   Mortgage-backed securities                         121,769               1,363              37        123,095
----------------------------------------------------------------------------------------------------------------
                                                     $218,889            $  2,176        $     81       $220,984
================================================================================================================
Held-to-maturity securities:
   State and municipal                               $  4,985            $     32        $     70       $  4,947
   Mortgage-backed securities
      And other                                         2,362                  43               5          2,400
----------------------------------------------------------------------------------------------------------------
                                                     $  7,347            $     75        $     75       $  7,347
================================================================================================================

1996
----------------------------------------------------------------------------------------------------------------
Available-for-sale securities:
   U.S. Treasury and agency                          $ 64,109            $    159        $    187       $ 64,081
   State and municipal                                  7,233                  59              21          7,271
   Mortgage-backed securities                          45,470                   9             303         45,176
----------------------------------------------------------------------------------------------------------------
                                                     $116,812            $    227        $    511       $116,528
================================================================================================================
Held-to-maturity securities:
   State and municipal                               $  6,449            $     55        $     42       $  6,462
   Mortgage-backed securities
      and other                                         3,231                  59              11          3,279
----------------------------------------------------------------------------------------------------------------
                                                     $  9,680            $    114        $     53       $  9,741
================================================================================================================
</TABLE>

                                       29
<PAGE>
                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements
<TABLE>

         The amortized cost and estimated  fair values of investment  securities
as of December 31, 1997,  by  contractual  maturity,  are shown below.  Expected
maturities will differ from contractual  maturities  because  borrowers may have
the right to call or  prepay  obligations  with or  without  call or  prepayment
penalties.
<CAPTION>

                                                        Available-for-sale                  Held-to-maturity
                                                            securities                         securities
                                                            ----------                         ----------
                                                                     Estimated                         Estimated
                                                    Amortized             fair        Amortized             fair
(In thousands)                                           cost            value             cost            value
-----------------------------------------------------------------------------------------------------------------
<S>                                                  <C>              <C>                <C>              <C>
Due within one year                                  $ 18,847         $ 18,869           $1,733           $1,736
Due after one through five years                       75,983           76,691            2,793            2,828
Due after five through ten years                       17,323           18,284              529              529
Due after ten years                                   106,736          107,140            1,632            1,594
-----------------------------------------------------------------------------------------------------------------
                                                      218,889          220,984            6,687            6,687
Federal Reserve Bank Stock                                  -                -              660              660
-----------------------------------------------------------------------------------------------------------------
                                                     $218,889         $220,984           $7,347           $7,347
=================================================================================================================
</TABLE>


         As of December 31, 1997 and 1996,  securities  with carrying  values of
approximately  $34,660,000  and  $26,638,000,   respectively,  were  pledged  as
collateral  for such items as deposits of public  funds,  Federal  Reserve  Bank
borrowings,  bankruptcy  court  accounts,  and  U.S.  Treasury,  tax,  and  loan
deposits.


                                       30
<PAGE>
                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(6)      Loans

         A summary of loans as of December 31 is as follows:

--------------------------------------------------------------------------------
(In thousands)                                          1997               1996
--------------------------------------------------------------------------------
Commercial                                          $110,595           $113,428
Consumer                                              24,677             22,509
Real estate - mortgage                               227,367            195,417
Real estate - construction                            41,863             38,014
Other                                                 15,595             20,349
--------------------------------------------------------------------------------
                                                     420,097            389,717
Less deferred loan fees                                  804                989
--------------------------------------------------------------------------------
                                                    $419,293           $388,728
================================================================================


         The  following is an analysis of the allowance for possible loan losses
for the years ended December 31:

--------------------------------------------------------------------------------
(In thousands)                                  1997          1996         1995
--------------------------------------------------------------------------------
Balance, beginning of year                    $3,672        $3,710       $3,769
Provision charged to expense                   1,520           685          527
Loans charged off                            (1,143)       (1,070)        (850)
Recoveries on loans previously
   charged off                                   217           347          264
--------------------------------------------------------------------------------
Balance, end of year                          $4,266        $3,672       $3,710
================================================================================

         Loans for which interest is no longer being accrued totaled $2,150,000,
         $1,564,000,  and  $2,481,000 as of December 31, 1997,  1996,  and 1995,
         respectively.  Interest  that would have been  recognized on nonaccrual
         loans was $125,000, $149,000, and $379,000 during 1997, 1996, and 1995,
         respectively.

         The recorded investment in impaired loans was $2,150,000 and $1,564,000
         at December  31, 1997 and 1996,  respectively.  The average  balance of
         impaired loans during 1997 and 1996 was $1,891,000 and $2,126,000.  The
         Company did not recognize any interest  income on impaired loans during
         1997 and 1996.

                                       31
<PAGE>
                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         The  Subsidiary  Banks  operate  in  a  geographic   region  comprising
         Monterey,  San Benito, Santa Clara, and Santa Cruz Counties. The Bank's
         credit risk is therefore dependent in part to the economic condition of
         this region.  Loans are made on the basis of a secure repayment source,
         namely the cash flows generated by the borrowing entity,  collateral is
         generally a secondary source for loan  qualification.  It is the Bank's
         policy to maintain the loan to value ratio on secured  loans below 75%.
         Management believes this practice tends to mitigate risks caused by the
         local economy.

         The Subsidiary Banks make loans to executive officers,  directors,  and
         their  affiliates in the ordinary  course of business.  Following is an
         analysis  of  activity  with  respect to such loans for the years ended
         December 31, 1997, and 1996:

--------------------------------------------------------------------------------
(In thousands)                                                   1997     1996
--------------------------------------------------------------------------------
Balance, beginning of year                                     $ 5,711  $ 5,002
New loans funded                                                 5,190    4,394
Repayments of loans                                             (2,714)  (3,685)
--------------------------------------------------------------------------------
Balance, end of year                                           $ 8,187  $ 5,711
================================================================================


(7)      Premises and Equipment

         Premises and equipment as of December 31 are summarized as follows:

--------------------------------------------------------------------------------
(In thousands)                                                1997        1996
--------------------------------------------------------------------------------
Land                                                        $2,888      $2,752
Buildings                                                   10,244       9,867
Furniture and equipment                                      9,796       8,929
Leasehold improvements                                       1,529       1,421
--------------------------------------------------------------------------------
                                                            24,457      22,969
Less accumulated depreciation and amortization               9,126       7,669
--------------------------------------------------------------------------------
Premises and equipment, net                                $15,331     $15,300
================================================================================

(8)      Time Deposits

         As of December  31,  1997 and 1996,  the  Company  had  liabilities  of
         $117,409,000  and  $80,952,000,  respectively,  for  time  deposits  in
         denominations of $100,000 or more.  Interest expense for these deposits
         was $6,243,000 and $4,036,000 in 1997 and 1996, respectively.

                                       32
<PAGE>
                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(9)      Income Taxes

         Components of income tax expense for the years ended December 31, 1997,
1996, and 1995 are as follows:

--------------------------------------------------------------------------------
(In thousands)                           1997            1996              1995
--------------------------------------------------------------------------------
Current:
   Federal                             $5,295          $3,696            $3,053
   State                                2,003           1,457             1,240
--------------------------------------------------------------------------------
                                        7,298           5,153             4,293
--------------------------------------------------------------------------------
Deferred:
   Federal                              (535)           (649)              (66)
   State                                (128)           (156)              (27)
--------------------------------------------------------------------------------
                                        (663)           (805)              (93)
--------------------------------------------------------------------------------
      Total                            $6,635          $4,348            $4,200
================================================================================

        The  temporary  differences  between the  financial  statement  carrying
        amounts  and tax  bases of  assets  and  liabilities  that  give rise to
        significant  components of the deferred tax asset and liability  amounts
        relate to the following as of December 31:


--------------------------------------------------------------------------------
(In thousands)                                                    1997     1996
--------------------------------------------------------------------------------
Deferred tax assets:
   Book provision for loan losses in excess of tax provision    $1,492   $1,096
   State franchise taxes                                           466      222
   Accrued interest on nonaccrual loans recognized for tax         239      182
   Expenses accrued for books not currently deductible             417      355
   Unrealized loss on securities available-for-sale                  -      118
   Loan fees and other, net                                        363      344
--------------------------------------------------------------------------------
      Total deferred tax assets                                  2,977    2,317
--------------------------------------------------------------------------------

Deferred tax liabilities:
   Tax depreciation in excess of book                              196       86
   Amortization related to sale/leaseback of building              126       34
   Difference in recognition of organization costs and other        11       11
   Unrealized gain on available-for-sale securities                941        -
--------------------------------------------------------------------------------
      Total deferred tax liabilities                             1,274      131
--------------------------------------------------------------------------------
Net deferred tax asset                                          $1,703   $2,186
================================================================================

                                       33
<PAGE>
                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         The net deferred tax asset represents recoverable taxes and is included
         in other assets in the accompanying  consolidated  balance sheets.  The
         Company believes that the net deferred tax asset is realizable  through
         sufficient  taxable income within the carryback  period and the current
         year taxable income.
<TABLE>

         Actual  income tax  expense  differs  from the  "expected"  tax expense
         (computed by applying the U.S. federal corporate income tax rate of 34%
         to earnings  before income  taxes) for the years ended  December 31, as
         follows:
<CAPTION>
------------------------------------------------------------------------------------------------------------------
(In thousands)                                                                 1997           1996           1995
------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>            <C>            <C>
Computed "expected" tax expense                                              $5,706         $3,531         $3,702
Increase (reduction) in income taxes resulting from:
   Franchise taxes, net of federal income tax benefit                         1,270            858            802
   Tax exempt income                                                           (371)          (368)          (335)
   Merger related costs                                                           -            325              -
   Other, net                                                                    30              2             31
------------------------------------------------------------------------------------------------------------------
                                                                             $6,635         $4,348         $4,200
==================================================================================================================
</TABLE>

(10)     Benefit Plans

         Stock  Option  Plans - The  Company's  1984 Stock Option Plan (the 1984
         Plan) under which incentive stock options or nonqualified stock options
         were  granted to certain  key  employees  or  directors  to purchase an
         aggregate of 53,364 shares of authorized, but unissued, common stock of
         the Company.  Unexercised  options were granted and  outstanding  as of
         December 31, 1997, for an aggregate of 53,364 shares. Options have been
         granted at an  exercise  price not less than the fair  market  value of
         such stock at the date of grant.  All stock options become  exercisable
         at the rate  determined by the Company's  Board of Directors and expire
         no later than 10 years after the date of grant.

         The  Company's  1994  Stock  Option  Plan (the 1994  Plan)  which was a
         successor to the 1984 Plan,  provides for  incentive  stock  options or
         nonqualified  stock  options for key employees or directors to purchase
         an aggregate of 592,915  shares of  authorized,  but  unissued,  common
         stock of the Company.  Unexercised options were granted and outstanding
         as of December  31, 1997,  for an  aggregate of 417,474  shares with an
         exercise  price equal to the fair market value of the Company's  common
         stock at the date of grant. The 1994 Plan provides that options granted
         thereunder  begin to vest 6 months after the date of grant ratably over
         4 years and expire no later than 10 years after the date of grant.

                                       34
<PAGE>
                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         The  Company has a  Directors  Stock  Option Plan (the 1991 Plan) under
         which, nonqualified options may be granted to non-employee directors of
         the Company and its  subsidiaries  to purchase an  aggregate of 202,776
         shares  of  authorized,  but  unissued,  common  stock  of the  Company
         according to a formula set forth in the 1991 Plan.  Unexercised options
         were granted and  outstanding as of December 31, 1997, for an aggregate
         of 83,116 shares with an exercise  price equal to the fair market value
         of the  Company's  common  stock at the date of  grant.  The 1991  Plan
         provides that options granted  thereunder  begin to vest 6 months after
         the date of grant and expire no later  than 10 years  after the date of
         grant.

         In  October  1995,  the  FASB  issued  SFAS  No.  123,  Accounting  for
         Stock-Based Compensation. SFAS No. 123 established financial accounting
         and reporting  standards for stock-based  employee  compensation plans.
         This  statement  defines a fair value based method of accounting for an
         employee stock option or similar equity instrument.  Under this method,
         compensation costs are measured at the grant date based on the value of
         the award and are  recognized  over the  service  period,  which is the
         vesting period.
<TABLE>

         As allowed under SFAS No. 123, the Company  applies APB Opinion No. 25,
         Accounting for Stock Issued to Employees and related interpretations in
         accounting for its plans.  Accordingly,  no compensation  cost has been
         recognized for its stock option plans. Had  compensation  costs for the
         Company's three stock option plans been determined consistent with SFAS
         No. 123,  the  Company's  net income and  earnings per share would have
         been reduced to the pro forma amounts indicated below:
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------------------------
(In thousands, except per share)                                    1997                1996               1995
----------------------------------------------------------------------------------------------------------------
<S>                                <C>                           <C>                  <C>                <C>
Net income                         As reported                   $10,147              $6,039             $6,611
                                   Pro forma                      $9,836              $5,883             $6,605
Basic earnings per share           As reported                     $2.36               $1.41              $1.55
                                   Pro forma                       $2.29               $1.37              $1.55
Diluted earnings per share         As reported                     $2.28               $1.36              $1.50
                                   Pro forma                       $2.21               $1.32              $1.50
</TABLE>

         The fair value of each option  grant is  estimated on the date of grant
         using  the  Black-Scholes   option-pricing  model  with  the  following
         assumptions  used for  grants  in 1997,  1996 and  1995,  respectively:
         dividend yield of 2.1%, 2.5% and 2.1%,  expected  volatility of 18% for
         all years,  risk-free  interest  rates of 5.86%,  5.64% and 5.39%,  and
         expected lives of 6.9, 6.1 and 5.5 years, respectively.

                                       35
<PAGE>
                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements
<TABLE>

         Below is a summary  of stock  option  activity  under all plans  during
1997, 1996 and 1995:
<CAPTION>
                                               1997                       1996                      1995
--------------------------------------------------------------------------------------------------------------------
                                                    Weighted                   Weighted                    Weighted
                                                     average                    average                     average
                                                    exercise                   exercise                    exercise
                                         Shares        price        Shares        price       Shares          price
--------------------------------------------------------------------------------------------------------------------
<S>                                     <C>           <C>          <C>           <C>         <C>             <C>
Outstanding at beginning
   of year                              388,895       $15.59       433,474       $14.57      400,967         $14.33
Granted                                 197,270        35.93       157,153        19.13       62,321          15.00
Exercised                               (17,436)       10.74      (200,106)       14.69      (22,811)         11.73
Forfeited                               (16,525)       13.32        (1,626)       11.32       (7,003)         13.74
--------------------------------------------------------------------------------------------------------------------
Outstanding at end of year              552,204       $22.36       388,895       $16.37      433,474         $14.57

Options exercisable at end of           489,046                    333,753                   366,350
year

Weighted average fair value of
    options granted during the year                    $9.40                      $4.12                       $3.12
--------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>

         The  following  table  summarizes   information   about  stock  options
outstanding at December 31, 1997:
<CAPTION>
                                                    Options Outstanding                       Options Exercisable
---------------------------------------------------------------------------------------------------------------------
                                                         Weighted
                                                          average         Weighted                          Weighted
                                          Number      contractual          average           Number          average
Exercise Prices                      outstanding             life   exercise price      outstanding   exercise price
--------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                 <C>            <C>             <C>               <C>
$6.83 to $15.00                          293,066             5.61           $13.97          292,315           $13.97
$15.01 to $20.00                          15,229             5.63            16.14           12,046            16.05
$20.01 to $30.00                          66,609             8.88            24.47           16,685            24.43
$30.01 to $43.50                         177,300             9.87            35.96          168,000            35.60
--------------------------------------------------------------------------------------------------------------------
$6.83 to $43.50                          552,204             7.37           $22.36          489,046           $21.81
--------------------------------------------------------------------------------------------------------------------
</TABLE>

         Employee  Stock  Ownership  Plan - In  1986,  the  Company  adopted  an
         Employee  Stock  Ownership  Plan  (ESOP)  covering   substantially  all
         employees.  The Company may make annual contributions to the ESOP in an
         amount  determined  by the Board of  Directors.  Contributions  are not
         intended to exceed an amount estimated to be an allowable deduction for
         tax purposes.  The Company made  contributions to the ESOP of $400,000,
         $275,000, and $292,000 in 1997, 1996, and 1995, respectively.

         401(k) Plan - The Company also has a tax deferred  profit  sharing plan
         and  thrift  plan  covering  all  eligible  employees.   The  Company's
         contributions  amounted to $70,000,  $71,000, and $70,000 for the years
         ended December 31, 1997, 1996, and 1995.

                                       36
<PAGE>
                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(11)     Fair Value of Financial Instruments
<TABLE>

         The  carrying  amounts  and  estimated  fair  values  of the  Company's
financial instruments are as follows:
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                  December 31, 1997           December 31, 1996
                                                                 -------------------          ------------------
                                                               Carrying      Estimated       Carrying      Estimated
(In thousands)                                                  amounts     fair value        amounts     fair value
---------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>            <C>            <C>            <C>
Assets:
   Cash and cash equivalents                                    $78,519        $78,519        $76,245        $76,245
   Investment securities                                        228,331        228,331        126,208        126,269
   Net loans                                                    430,620        430,582        395,538        395,796
---------------------------------------------------------------------------------------------------------------------
Liabilities:
   Demand deposits, noninterest bearing                        $174,649       $174,649       $131,332       $131,332
   Demand deposits, interest bearing                             97,322         97,322         84,770         84,770
   Savings and money market                                     173,151        173,151        164,890        164,890
   Time certificates                                            238,276        238,465        166,190        166,632
---------------------------------------------------------------------------------------------------------------------
</TABLE>
         The following  methods and  assumptions  were used to estimate the fair
         value  of  each  class  of  financial   instruments  for  which  it  is
         practicable to estimate that value.

         Cash and Cash Equivalents - The carrying amount approximates fair value
         because of the short maturities of these instruments.

         Investment   Securities   -  The   fair   value  of   investments   and
         mortgage-backed   securities,   except   certain  state  and  municipal
         securities,  is  estimated  based on bid prices  published in financial
         newspapers or bid quotations received from securities dealers. The fair
         value  of  certain  state  and  municipal  securities  is  not  readily
         available through market sources other than dealer quotations,  so fair
         value   estimates   are  based  on  quoted  market  prices  of  similar
         instruments,  adjusted for differences  between the quoted  instruments
         and the instruments being valued.

         Loans - Fair values are estimated for  portfolios of loans with similar
         financial  characteristics.  Loans  are  segregated  by  type  such  as
         commercial, commercial real estate, residential mortgage, and consumer.
         Each loan category is further  segmented into fixed and adjustable rate
         interest terms and by performing and nonperforming categories.

                                       37
<PAGE>
                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         The  fair  value of  performing  fixed  rate  loans  is  calculated  by
         discounting  scheduled cash flows through the estimated  maturity using
         estimated  market  discount  rates that reflect the credit and interest
         rate risk  inherent in the loan.  The  estimate of maturity is based on
         the  Company's  historical  experience  with  repayments  for each loan
         classification,  modified, as required, by an estimate of the effect of
         current economic and lending  conditions.  The fair value of performing
         variable rate loans is judged to approximate book value for those loans
         whose rates reprice in less than 90 days. Rate floors and rate ceilings
         are not  considered for fair value purposes as the number of loans with
         such limitations is not significant.

         Fair  value  for  significant  nonperforming  loans is based on  recent
         external  appraisals.  If appraisals are not available,  estimated cash
         flows are discounted using a rate commensurate with the risk associated
         with the estimated cash flows.  Assumptions regarding credit risk, cash
         flows, and discount rates are  judgmentally  determined using available
         market information and specific borrower information.

         Deposit  Liabilities  - The  fair  value  of  deposits  with no  stated
         maturity, such as non-interest bearing demand deposits, savings and NOW
         accounts,  and money market and  checking  accounts,  approximates  the
         amount payable on demand.  The fair value of certificates of deposit is
         judged to approximate book value for those certificates whose remaining
         maturities are less than 90 days. For all other certificates, estimated
         cash flows are discounted using rates currently offered for deposits of
         similar remaining maturities.

         Limitations  - Fair value  estimates  are made at a  specific  point in
         time,  based on relevant market  information and information  about the
         financial  instrument.  These  estimates  do not reflect any premium or
         discount  that  could  result  from  offering  for sale at one time the
         Company's entire holdings of a particular  financial  instrument.  Fair
         value estimates are based on judgments  regarding  future expected loss
         experience,   current  economic  conditions,  risk  characteristics  of
         various financial  instruments,  and other factors. These estimates are
         subjective  in  nature  and  involve   uncertainties   and  matters  of
         significant judgment and therefore cannot be determined with precision.
         Changes in assumptions could significantly affect the estimates.


                                       38
<PAGE>
                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


         Fair value  estimates are based on existing on- and  off-balance  sheet
         financial  instruments  without  attempting  to  estimate  the value of
         anticipated  future  business  and the value of assets and  liabilities
         that are not considered  financial  instruments.  In addition,  the tax
         ramifications  related to the  realization of the unrealized  gains and
         losses can have a significant  effect on fair value  estimates and have
         not been considered in many of the estimates.


(12)     Commitments and Contingencies

         Future minimum rental payments for Company premises under noncancelable
         operating leases as of December 31, 1997 are as follows:

------------------------------------------------------------------------------
                                                                Minimum lease
                                                                     payments
Year ending December 31,                                       (In thousands)
------------------------------------------------------------------------------
1998                                                                     $931
1999                                                                      683
2000                                                                      461
2001                                                                      213
2002                                                                      213
Thereafter                                                                913
------------------------------------------------------------------------------
                                                                        3,414
Minimum rentals receivable under noncancelable subleases                (868)
------------------------------------------------------------------------------
                                                                       $2,546
==============================================================================

         Rent expense under operating  leases totaled  $802,000,  $796,000,  and
         $781,000  for the  years  ended  December  31,  1997,  1996,  and 1995,
         respectively.   Related   sublease  rental  income  totaled   $137,000,
         $131,000, and $82,000, respectively.

         In December  1988, the Company  entered into an operating  lease with a
         member  of its Board of  Directors  for  rental  of its  administrative
         headquarters.  This  lease  required  payments  totaling  approximately
         $199,000, $192,000, and $188,000 for the years ended December 31, 1997,
         1996, and 1995, respectively. The lease expires on April 30, 1999.

         In the normal course of business,  there are  outstanding  commitments,
         such as commitments  to extend  credit,  which are not reflected in the
         accompanying  consolidated  financial  statements.   These  commitments
         involve elements of credit and interest rate risk.  Management does not
         anticipate any loss will result from such  commitments.


                                       39
<PAGE>
                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         As of December  31,  1997,  amounts  committed  to extend  credit under
         normal  lending  agreements  aggregated   approximately   $134,638,000.
         Management reviews the risk associated with these credits in evaluating
         the  overall  adequacy  of the  allowance  for  possible  loan  losses.
         Additionally, there are approximately $4,193,000 in outstanding standby
         letters of credit which,  in effect,  are  guarantees of obligations of
         customers.

         The Company,  through the  Subsidiary  Banks,  has  borrowing  lines of
         approximately  $51,000,000 with primary correspondent banks. There were
         no borrowings outstanding under these lines as of December 31, 1997 and
         1996.

(13)     Regulatory Capital

         The  Federal  Reserve  Board and the  Comptroller  have  established  a
         minimum  leverage  ratio of 3% Tier 1 capital to total  assets for bank
         holding  companies  and national  banks that have  received the highest
         composite  regulatory  rating and are not  anticipating or experiencing
         any  significant  growth.  All other  institutions  will be required to
         maintain a leverage ratio of at least 100 to 200 basis points above the
         3% minimum.
<TABLE>

         Following are the Company's and the  Subsidiary  Banks'  risk-based and
         leverage capital ratios as of December 31, 1997:
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Risk Based Capital Ratio
As of December 31, 1997
-------------------------------------------------------------------------------------------------------------------
                                            Company                  South Valley                  First National
(Dollars in thousands)                  Amount       Ratio        Amount          Ratio       Amount         Ratio
-------------------------------------------------------------------------------------------------------------------
<S>                                    <C>          <C>          <C>             <C>         <C>            <C>
Tier 1 capital                         $68,925      13.58%       $17,592         11.71%      $44,601        12.81%
Tier 1 capital minimum
   requirement                          20,295       4.00%         6,009          4.00%       13,929         4.00%
-------------------------------------------------------------------------------------------------------------------
      Excess                            48,630       9.58%        11,583          7.71%       30,672         8.81%
===================================================================================================================
Total capital                           73,191      14.43%        19,337         12.87%       47,116        13.53%
Total capital minimum
    requirement                         40,589       8.00%        12,017          8.00%       27,858         8.00%
-------------------------------------------------------------------------------------------------------------------
      Excess                            32,602       6.43%         7,320          4.87%       19,258         5.53%
===================================================================================================================
Risk-adjusted assets                  $507,363                  $150,216                    $348,220
===================================================================================================================


                                       40
<PAGE>

                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

December 31, 1996
-------------------------------------------------------------------------------------------------------------------
                                            Company                  South Valley               First National
(Dollars in thousands)                  Amount       Ratio        Amount          Ratio       Amount         Ratio
-------------------------------------------------------------------------------------------------------------------
Tier 1 capital                         $63,469      13.91%       $16,096         11.63%      $42,034        13.40%
Tier 1 capital minimum
   requirement                          18,254       4.00%         5,534          4.00%       12,546         4.00%
-------------------------------------------------------------------------------------------------------------------
      Excess                            45,215       9.91%        10,562          7.63%       29,488         9.40%
===================================================================================================================
Total capital                           67,141      14.71%        17,409         12.58%       44,258        14.11%
Total capital minimum
    requirement                         36,508       8.00%        11,069          8.00%       25,092         8.00%
-------------------------------------------------------------------------------------------------------------------
      Excess                            30,633       6.71%         6,340          4.58%       19,166         6.11%
===================================================================================================================
Risk-adjusted assets                  $456,356                  $138,362                    $313,644
===================================================================================================================
</TABLE>
<TABLE>
         As  indicated  in  the  table  above,  the  Company's   capital  ratios
         significantly  exceeded the minimum  capital levels required by current
         federal  regulations.  Management  believes  that the  Company  and the
         Subsidiary Banks will continue to meet their respective minimum capital
         requirements in the foreseeable future.
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Leverage Capital Ratio
December 31, 1997
                                               Company                 South Valley               First National
--------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)                   Amount        Ratio        Amount          Ratio        Amount       Ratio
--------------------------------------------------------------------------------------------------------------------
<S>                                     <C>            <C>         <C>              <C>         <C>           <C>
Tier 1 capital to quarterly average
    Total assets (Leverage Ratio)       $68,925        9.17%       $17,592          8.03%       $44,601       8.49%
Minimum leverage requirement          22,543 to     3.00% to      6,575 to       3.00% to     15,761 to    3.00% to
                                         37,572        5.00%        10,958          5.00%        26,268       5.00%
--------------------------------------------------------------------------------------------------------------------
      Excess                          31,353 to     4.17% to      6,634 to       3.03% to     18,333 to    3.49% to
                                         46,382        6.17%        11,017          5.03%        28,840       5.49%
====================================================================================================================
Total quarterly average assets         $751,439                   $219,168                     $525,357
====================================================================================================================

December 31, 1996                               Company                 South Valley               First National
--------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)                   Amount        Ratio        Amount          Ratio        Amount       Ratio
--------------------------------------------------------------------------------------------------------------------
Tier 1 capital to quarterly average
    Total assets (Leverage Ratio)       $63,469       10.55%       $16,096          8.61%       $42,034      10.29%
Minimum leverage requirement          18,045 to     3.00% to      5,611 to       3.00% to     12,255 to    3.00% to
                                         30,075        5.00%         9,351          5.00%        20,425       5.00%
--------------------------------------------------------------------------------------------------------------------
      Excess                          33,394 to     5.55% to      6,745 to       3.61% to     21,609 to    5.29% to
                                         45,424        7.55%        10,485          5.61%        29,779       7.29%
====================================================================================================================
Total quarterly average assets         $601,496                   $187,024                     $408,502
====================================================================================================================
</TABLE>


                                       41
<PAGE>
                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(14)     Pacific Capital Bancorp (Parent Company Only)

         The following are the financial statements of Pacific Capital Bancorp:

--------------------------------------------------------------------------------
                                 BALANCE SHEETS
Years ended December 31,
--------------------------------------------------------------------------------
(In thousands)                                             1997            1996
--------------------------------------------------------------------------------
Assets
Cash and cash equivalents                                  $538            $937
Loans                                                         -           1,042
Premises and equipment, net                               3,500           3,022
Investment in subsidiaries                               65,826          58,178
Other assets                                              5,360             910
--------------------------------------------------------------------------------
Total Assets                                            $75,224         $64,089
================================================================================
Liabilities and Shareholders' Equity
Liabilities                                              $2,666            $443
Shareholders' equity                                     72,558          63,646
--------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity              $75,224         $64,089
================================================================================


--------------------------------------------------------------------------------
                              STATEMENTS OF INCOME
Years ended December 31,
--------------------------------------------------------------------------------
(In thousands)                                          1997      1996     1995
--------------------------------------------------------------------------------
Equity in undistributed income of subsidiaries        $6,211    $3,061   $6,010
Cash dividends received from bank subsidiaries         4,799     3,993      882
Interest income and fees on loans                         36       136      214
Other expenses                                         (899)   (1,151)    (495)
--------------------------------------------------------------------------------
   Net income                                        $10,147    $6,039   $6,611
================================================================================


                                       42
<PAGE>
<TABLE>
                    PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                            STATEMENTS OF CASH FLOWS
<CAPTION>
Years ended December 31,
----------------------------------------------------------------------------------------------------------
(In thousands)                                                                1997        1996        1995
----------------------------------------------------------------------------------------------------------
<S>                                                                       <C>         <C>         <C>
Cash flows from operating activities:
  Net income                                                              $ 10,147    $  6,039    $  6,611
   Adjustments to reconcile net income to net cash
     provided by operating activities:
      Equity in undistributed net income of subsidiaries                   (11,010)     (7,054)     (6,892)
      Dividends received from subsidiaries                                   4,799       3,993         882
      Increase in other assets                                              (4,450)       (341)        (68)
      Increase (decrease) in other liabilities                               2,223         140         (34)
----------------------------------------------------------------------------------------------------------
       Net cash provided by operating activities                             1,709       2,777         499
----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
  Net change in loans                                                        1,042         107       1,931
  Capital expenditures                                                        (386)     (1,157)       (493)
----------------------------------------------------------------------------------------------------------
       Net cash provided by (used in) investing activities                     656      (1,050)      1,438
----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
  Repurchase and retirement of stock                                          (456)       (605)       (111)
  Proceeds from stock options exercised                                        410         284         158
  Cash paid for fractional shares                                              (40)        (21)        (15)
  Cash paid for dividends                                                   (2,678)     (2,053)     (1,684)
----------------------------------------------------------------------------------------------------------
       Net cash used in financing activities                                (2,764)     (2,395)     (1,652)
----------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents                          (399)       (668)        285
Cash and cash equivalents at beginning of year                                 937       1,605       1,320
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                  $    538    $    937    $  1,605
==========================================================================================================
Supplemental disclosures:
   Noncash investment and financing activities:
      Transfer from retained earnings to common stock
        due to stock dividend                                             $  9,000    $  5,348    $  3,132
==========================================================================================================
</TABLE>

         The ability of the Company to pay  dividends  will largely  depend upon
         the  dividends  paid to it by the  Subsidiary  Banks.  There  are legal
         limitations on the ability of the Subsidiary  Banks to provide funds to
         the Company in the form of loans,  advances,  or  dividends.  Under the
         National Bank Act, the  Subsidiary  Banks may not declare  dividends in
         any  calendar  year  that  exceeds  certain  legal   limitations.   The
         approximate  amount of restricted  equity of the Subsidiary Banks as of
         December 31, 1997 was $47,826,000.


                                       43
<PAGE>

                             PACIFIC CAPITAL BANCORP

                      Management's Discussion and Analysis

                                      1997

This document may contain  forward-looking  statements that are subject to risks
and  uncertainties,  including,  but not limited to the local economy,  the real
estate market in  California,  and other factors  beyond the Company's  control.
Such risks and  uncertainties  could cause actual  results to differ  materially
from those  indicated.  For a  discussion  of factors  that could  cause  actual
results to differ,  please see the discussion  contained herein.  Readers should
not  place  undue  reliance  on   forward-looking   statements,   which  reflect
management's  view  only  as of the  date  hereof.  The  Company  undertakes  no
obligation  to  publicly  revise  these  forward-looking  statements  to reflect
subsequent  events or  circumstances.  Readers are also encouraged to review the
Company's   publicly   available   filings  with  the  Securities  and  Exchange
Commission.

The Company

Pacific Capital Bancorp (the "Company")  through its wholly owned  subsidiaries,
First National Bank of Central California ("First  National"),  and South Valley
National  Bank ("South  Valley")  engages in a broad range of financial  service
activities.  First National and South Valley are collectively referred to herein
as  "Subsidiary  Banks," and  references to the Company  include the  Subsidiary
Banks.

On November 20, 1996, the Company acquired South Valley  Bancorporation (SVB) in
a  transaction  accounted  for  as a  pooling-of-interests.  Accordingly,  these
consolidated  financial  statements  were  restated on a combined  basis for all
periods presented.

The  following  sections set forth a  discussion  of the  significant  operating
changes, business trends, financial condition,  earnings,  capital position, and
liquidity that have occurred in the  three-year  period ended December 31, 1997,
together with an assessment,  when considered  appropriate,  of external factors
that may affect the Company in the  future.  This  discussion  should be read in
conjunction with the Company's  consolidated  financial  statements and notes on
pages _____ of this annual report.

Summary of Financial Results

Net  income  for 1997 was  $10,147,000  or  $2.28  per  share,  an  increase  of
$4,108,000  or $0.92 per share from 1996.  This increase in net income is due to
an  increase  in net  interest  income of  $5,191,000  or 16.9%  over  1996.  In
addition, results from the year ended December 31, 1996 contained merger-related
expenses incurred relating to the merger with South Valley  Bancorporation.  Net
income for 1996 excluding the one-time merger-related expenses was $7,540,000 or
$1.69 per share and  represented an increase of $929,000 or $0.19 per share over
results for 1995.

                                       44
<PAGE>

In 1997 the  Company  paid  four  cash  dividends  of  $0.165  in  March,  June,
September,  and  December.  In 1996,  the Company  distributed  three $0.15 cash
dividends in March,  June,  September  and  December.  In addition,  the Company
distributed  a 5% stock  dividend  in each of the years in the three year period
ended  December 31, 1997.  Earnings  per share  amounts have been  retroactively
restated to reflect these stock dividends.  The return on average  shareholders'
equity was 14.8% in 1997, compared to 9.6% in 1996 and 11.4% in 1995.

The Company  believes that the economies in which it operates,  Monterey,  Santa
Cruz, Santa Clara, and San Benito Counties,  have experienced  strong growth and
favorable  economic  activity in the past three years.  Signs of the strength in
these local economies  include  sustained quality loan demand and strong deposit
growth.  On a national  scale,  the Company is  forecasting  a  relatively  flat
interest rate  environment  due to minimal  inflation  prospects and very modest
growth.

Certain information concerning the Company's average balances,  yields and rates
on average interest-earning assets and interest-bearing liabilities is set forth
in the following table. Interest yields and amounts earned include net loan fees
of $1,312,000, $1,211,000, and $1,152,000 in 1997, 1996, and 1995, respectively.


                                       45
<PAGE>
<TABLE>
<CAPTION>
                                                  AVERAGE BALANCE SHEETS
---------------------------------------------------------------------------------------------------------------------
                                            1997                        1996                          1995
                               Average   Yield/  Interest Average   Yield/   Interest   Average   Yield/   Interest
(Dollars in thousands)         Balance    Rate    Amount  Balance    Rate     Amount    Balance    Rate     Amount
---------------------------------------------------------------------------------------------------------------------
<S>                            <C>          <C>    <C>    <C>           <C>     <C>      <C>          <C>     <C>
Assets
Earning assets
 Investment securities:
  Taxable                      $144,331     6.4%   $9,239 $124,709      6.1%    $7,645   $95,408      5.7%    $5,455
  Non-taxable                    13,247     4.9%      651   14,966      5.0%       750    17,529      5.2%       903
  Federal funds sold             46,211     5.4%    2,482   34,267      5.3%     1,805    35,564      5.3%     1,871
---------------------------------------------------------------------------------------------------------------------
Total investment securities     203,789     6.1%   12,372  173,942      5.9%    10,200   148,501      5.5%     8,229

Loans                           411,546     9.9%   40,843  332,421     10.2%    33,758   290,265     10.5%    30,449
---------------------------------------------------------------------------------------------------------------------

Total earning assets            615,335     8.6%   53,215  506,363      8.7%    43,958   438,760      8.8%    38,678
Non-earning assets
  Premises and equipment         15,270                     14,769                        13,201
  Other                          46,886                     47,554                        44,040
---------------------------------------------------------------------------------------------------------------------

Total non-earning assets         62,156                     62,323                        57,241
---------------------------------------------------------------------------------------------------------------------

Total assets                   $677,491                   $568,686                      $496,007
=====================================================================================================================

Liabilities and
Shareholders' Equity
 Interest-bearing deposits:
  Demand                        $85,769     1.0%     $846  $77,306      1.1%      $846   $87,916      1.7%    $1,502
  Savings and money market      169,577     2.9%    4,844  168,553      2.8%     4,664   140,209      2.8%     3,913
  Time certificates             214,664     5.4%   11,666  146,359      5.3%     7,782   108,026      5.1%     5,507
  Other interest-bearing            522     5.6%       29      716      3.8%        27     1,030      4.8%        49
     liabilities
---------------------------------------------------------------------------------------------------------------------

Total                           470,532     3.7%   17,385  392,934      3.4%    13,319   337,181      3.3%    10,971
Non interest-bearing deposits
And other liabilities:
  Demand, non                   134,943                    109,615                        95,824
     interest-bearing
  Other liabilities               3,663                      3,031                         4,819
  Shareholder's equity           68,353                     63,106                        58,183
---------------------------------------------------------------------------------------------------------------------

Total                           206,959                    175,752                       158,826
---------------------------------------------------------------------------------------------------------------------

TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY           $677,491                   $568,686                      $496,007
=====================================================================================================================

NET INTEREST INCOME                               $35,830                      $30,639                       $27,707
NET INTEREST MARGIN                         5.8%                        6.1%                          6.3%
---------------------------------------------------------------------------------------------------------------------
</TABLE>

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


Net Interest Income

Net  interest  income,  the  difference  between  interest  earned  on loans and
investments and the interest paid on deposits and other sources of funds, is the
principal  component of the Company's  earnings.  The preceding  table shows the
composition of average earning assets and average interest-bearing  liabilities,
average  yields and rates,  and the net interest  margin for 1995 through  1997.
Interest  income  increased  $9,257,000  or 21.1%  from  $43,958,000  in 1996 to
$53,215,000 in 1997, after increasing $5,280,000 or 13.7% from 1995 to 1996. The
increases in 1997 and 1996 are the result of higher  average loan and investment
volumes partially offset by a slightly


                                       46
<PAGE>

lower yield on the loan portfolio. Total interest and fees produced a 8.6% yield
on average  earning assets in 1997,  compared to 8.7% and 8.8% yields on average
earning assets in 1996 and 1995, respectively.

Total interest  expense for 1997 was  $17,385,000,  an increase of $4,066,000 or
30.5% over 1996,  compared to an increase  of  $2,348,000  or 21.4% from 1995 to
1996. The Company's  cost of funds  experienced an increase of 0.3% from 1996 to
1997 and an  increase of 0.1% from 1995 to 1996.  The cost of funds  increase in
1997 was due primarily to a change in the mix of deposits.  The increase in 1996
over 1995 was due to the prevailing rising interest rate environment.
<TABLE>

The Company's net yield on interest-earning assets is affected by changes in the
rates   earned  and  paid  and  the  volume  of   interest-earning   assets  and
interest-bearing  liabilities.  The  impact of changes in volume and rate on net
interest  income  in 1997  and 1996 is shown  in the  following  table.  Changes
attributable to both volume and rate have been allocated to rate.
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                      1997 Compared to 1996                 1996 Compared to 1995
(In thousands)                            Volume          Rate        Total        Volume         Rate         Total
---------------------------------------------------------------------------------------------------------------------
<S>                                       <C>             <C>        <C>           <C>            <C>         <C>
Investment securities
   Taxable                                $1,203          $391       $1,594        $1,675         $515        $2,190
   Non-taxable                               (86)          (13)         (99)         (132)         (21)         (153)
   Federal funds sold                        629            48          677           (68)           2           (66)
Loans                                      8,035          (950)       7,085         4,708       (1,399)        3,309
---------------------------------------------------------------------------------------------------------------------
      Total                                9,781          (524)       9,257         6,183         (903)        5,280
---------------------------------------------------------------------------------------------------------------------
Demand, interest bearing                      93           (93)           -          (181)        (475)         (656)
Savings                                       28           152          180           791          (40)          751
Time certificates                          3,632           252        3,884         1,954          321         2,275
Fed funds purchased                           (7)            9            2           (15)          (7)          (22)
---------------------------------------------------------------------------------------------------------------------
      Total                                3,746           320        4,066         2,549         (201)        2,348
---------------------------------------------------------------------------------------------------------------------
Increase in net interest income           $6,035         $(844)      $5,191        $3,634        $(702)       $2,932
=====================================================================================================================
</TABLE>

Earning Assets

Outstanding  total loans averaged  $411,546,000 in 1997 compared to $332,421,000
during 1996. This represents an increase of $79,125,000 or 23.8%, compared to an
increase of  $42,156,000 or 14.5% from 1995 to 1996. The increase in total loans
outstanding during 1997 is due to increased loan demand from qualified borrowers
and is reflective of the strength of the economy in most of the primary  markets
which  the  Company  serves.  The table on the  following  page  summarizes  the
composition of the loan portfolio as of December 31:

                                       47
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
(In thousands)                                  1997          1996           1995           1994          1993
---------------------------------------------------------------------------------------------------------------
<S>                                         <C>           <C>             <C>            <C>           <C>
Commercial                                  $110,595      $113,428        $82,583        $77,402       $63,926
Real Estate - construction                    41,863        38,014         32,409         39,352        26,799
Real Estate - mortgage                       227,367       195,417        154,572        144,687       146,675
Consumer                                      24,677        22,509         25,604         22,907        22,185
Other                                         14,791        19,360          5,727          6,004         6,318
---------------------------------------------------------------------------------------------------------------
        Total                               $419,293      $388,728       $300,895       $290,352      $265,903
===============================================================================================================
</TABLE>

The Company lends  primarily to small- and  medium-sized  businesses  within its
markets,  which is comprised  principally of Monterey,  Santa Cruz, Santa Clara,
and San Benito Counties.

A  majority  of the  Company's  loan  portfolio  consists  of loans  secured  by
commercial,  industrial,  and residential real estate.  As of December 31, 1997,
real estate mortgage and construction loans represented $269,230,000 or 64.2% of
total loans,  compared to  $233,431,000  or 60.0% of total loans at December 31,
1996.

Real  estate   mortgage   loans  included   commercial   real  estate  loans  of
approximately  $175,684,000,  one-to-four  family  home  loans of  approximately
$25,374,000,  equity lines of credit of approximately  $19,462,000,  multifamily
dwelling loans of approximately  $4,334,000 and farm land loans of approximately
$2,513,000.  Construction  loans  totaled  $41,863,000  or  10.0%  of  the  loan
portfolio as of December 31, 1997, which represents an increase of $3,849,000 or
10.1% from  December 31, 1996.  Management  believes that the Bank does not have
any  significant  loss  exposure  with respect to such loans,  due to the Bank's
collateral position.  In general,  advances do not exceed 70% of appraised value
on  commercial  real estate loans and 75% on  residential  mortgages.  Continued
emphasis is placed on this policy and, accordingly,  appraisals are periodically
updated as conditions change.

The Company  finances the construction of residential and commercial real estate
properties. These loans are all at variable rates, are secured by first deeds of
trust on the underlying  properties,  and generally have maturities of less than
24 months. Repayment is based on a pre-qualification  analysis of the borrower's
ability to obtain take-out  financing.  The Company's  construction  lending has
been in areas which  management  believes to have favorable  market  conditions.
Advances on residential  and  commercial  projects are limited in general to the
lower of approximately 75% and 70%, respectively, of cost or appraised value.

Commercial loans not secured by real estate totaled $110,595,000 or 26.4% of the
total loan portfolio at December 31, 1997 compared to $113,428,000,  or 29.2% of
total loans as of December 31, 1996.

Consumer loans increased  $2,168,000 or 9.6% during 1997.  Consumer loans, as of
December 31, 1997, represent 5.9% of the total loan portfolio,  compared to 5.8%
of the 1996 loan portfolio.

The Company had undisbursed loans totaling $134,638,000 as of December 31, 1997,
primarily  representing  available  lines of credit and the unfunded  portion of
construction loan commitments.

                                       48
<PAGE>
<TABLE>
The following  table sets forth the maturity  distribution of the loan portfolio
as of December 31, 1997:
<CAPTION>
----------------------------------------------------------------------------------------------------------
                                                               After one
                                          In one year       year through      After five
(In thousands)                                or less         five years           years            Total
----------------------------------------------------------------------------------------------------------
<S>                                           <C>                <C>              <C>            <C>
Commercial                                   $ 93,317            $14,276         $ 3,002         $110,595
Real Estate - construction                     41,101                484             278           41,863
Real Estate - mortgage                        108,888             63,205          55,274          227,367
Consumer                                       11,901             10,398           2,378           24,677
Other                                           3,067              4,962           6,762           14,791
----------------------------------------------------------------------------------------------------------
        Gross loans                          $258,274            $93,325         $67,694         $419,293
==========================================================================================================
</TABLE>

The fixed rate loan categories discussed above mature as follows: $14,072,000 in
1998,  $9,201,000  in 1999,  $10,212,000  in  2000,  $20,566,000  in  2001,  and
$16,738,000 in 2002, with the remaining  $67,694,000  maturing  thereafter.  The
variable loan rate categories discussed above mature as follows: $244,287,000 in
1998,  $15,198,000  in  1999,  $5,780,000  in  2000,  $8,107,000  in  2001,  and
$7,438,000 maturing in 2002.

Interest Rate Sensitivity  Interest rate sensitivity is the relationship between
market   interest   rates  and  net  interest   income  due  to  the   repricing
characteristics  of assets and  liabilities.  If more  liabilities  than  assets
reprice in a given period (a liability sensitive position), market interest rate
changes will be reflected  more quickly in liability  rates.  If interest  rates
decline, a liability sensitive position will benefit net income.  Alternatively,
where assets  reprice more quickly than  liabilities in a given period (an asset
sensitive position) a decline in market rates will have an adverse effect on net
interest income.

The table on the following  page presents the interest rate  sensitivity  of the
Company as of December 31, 1997. For any given period,  the structure is matched
when an equal amount of assets and liabilities  reprice. Any excess of assets or
liabilities  over these matched items results in the gap, or mismatch,  shown at
the foot of the table.  A negative gap  indicates  liability  sensitivity  and a
positive gap indicates asset sensitivity.

                                       49
<PAGE>
<TABLE>

-----------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity as of December 31, 1997
-----------------------------------------------------------------------------------------------------------
<CAPTION>
                                                       Repricing Opportunity
                                                0 - 90      91 - 180    181 - 365       Over
(In thousands)                                    Days          Days         Days   One Year         Total
-----------------------------------------------------------------------------------------------------------
<S>                                            <C>           <C>          <C>        <C>          <C>
Federal funds sold                             $26,405            $-           $-         $-       $26,405
Loans                                          216,404        20,202       30,662    163,352       430,620
Taxable investments                             14,501         5,281       18,404    177,650       215,836
Non-taxable investments                            552           228        1,988     11,859        14,627
-----------------------------------------------------------------------------------------------------------
   Total Earning Assets                        257,862        25,711       52,054    352,861       687,488
-----------------------------------------------------------------------------------------------------------
Interest bearing demand                         97,322             -            -          -        97,322
Savings deposits                               161,195             -        6,082      5,874       173,151
Time certificates                               88,242        63,784       82,329      3,921       238,276
-----------------------------------------------------------------------------------------------------------
  Total interest-bearing liabilities           346,759        63,784       88,411      9,795       508,749
-----------------------------------------------------------------------------------------------------------
Gap                                          $(88,897)     $(38,073)    $(37,357)   $343,066      $178,739
Cumulative gap                                (88,897)     (126,970)    (164,627)    178,739
===========================================================================================================
</TABLE>

The Company has remained  flexible in determining  the point at which to reprice
deposits.  This flexibility mitigates the Company's liability sensitive position
in the under one year category.

Quality of Loans The Company had net loan charge-offs of $926,000,  $723,000 and
$586,000 in 1997, 1996 and 1995,  respectively.  Net charge-offs as a percent of
average  loans has  remained  relatively  constant  over the last three years at
0.23%,  0.22%,  and 0.20% for the years ended December 31, 1997, 1996, and 1995,
respectively.  Over the last five years,  the low amount of net  charge-offs  to
average loans is indicative of the continued  emphasis  placed on credit quality
standards in the loan approval  process as well as close  monitoring of the loan
portfolio. The Company's net charge-offs as a percent of average loans have been
below most industry averages in each year reflected in the following table.

Management  anticipates  the  Company's  charge-off  experience  in  1998  to be
consistent  with that  experienced  in 1997  primarily  due to the  strength and
growth in the local  economic  areas in which the  Company  serves.  This factor
continues to be of  importance  in assessing  the adequacy of the  allowance for
possible loan losses.

The table on the following page  summarizes the actual loan losses and provision
for possible loan losses during the last five fiscal years by loan category:


                                       50
<PAGE>
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------
Summary of Loan Loss Activity
(In thousands)                                1997      1996       1995      1994      1993
--------------------------------------------------------------------------------------------
<S>                                       <C>       <C>        <C>       <C>       <C>
Total loans outstanding, end of year      $419,293  $388,728   $300,895  $290,352  $265,903
Average loans during the year              411,546   332,421    290,265   277,263   259,131
Allowance for possible loan losses:
Balance, beginning of year                   3,672     3,710      3,769     3,753     3,479
    Charge-off by loan category
        Commercial                             873       761        480       331       491
        Consumer                                59       188        129       148       327
        Real estate                            211       121        241       186       364
--------------------------------------------------------------------------------------------
           Total                             1,143     1,070        850       665     1,182
--------------------------------------------------------------------------------------------
Recoveries by loan category
        Commercial                             120       239         98       144        62
        Consumer                                24        91         42        37        54
        Real estate                             73        17        124        21        62
--------------------------------------------------------------------------------------------
           Total                               217       347        264       202       178
--------------------------------------------------------------------------------------------
Net charge-offs                                926       723        586       463     1,004
Provision charged to expense                 1,520       685        527       479     1,278
--------------------------------------------------------------------------------------------
Balance, end of year                        $4,266    $3,672     $3,710    $3,769    $3,753
============================================================================================
Ratios:
Net charge-offs to
   average loans                             0.23%     0.22%      0.20%     0.17%     0.39%
Allowance to loans at end of year            1.02%     0.94%      1.23%     1.30%     1.41%
--------------------------------------------------------------------------------------------
</TABLE>


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

The Company  evaluates  the  allowance  for  possible  loan losses based upon an
individual  analysis  of  specific  categories  of loans.  The  adequacy  of the
allowance can be determined only on an approximate  basis, since estimates as to
the  magnitude  and  timing of loan  losses are not  predictable  because of the
impact of external  events.  In  addition,  the Company has for the last several
years  contracted  with an independent  loan review  consulting firm to evaluate
overall  credit  quality on an ongoing  basis.  Management  then  considers  the
adequacy of the allowance for possible loan losses in relation to the total loan
portfolio.

The provision for possible loan losses charged against earnings is based upon an
analysis  of the actual  migration  of loans to losses  plus an amount for other
factors  which,  in  management's  judgment,  deserve  recognition in estimating
possible  loan losses.  These  factors  include:  specific  loan  conditions  as
determined by management;  the historical  relationship  between charge-offs and
the level of the allowance;  the estimated future loss in all significant loans;
known  deterioration in

                                       51
<PAGE>

concentrations  of  credit,  certain  classes  of loans or  pledged  collateral;
historical  loss experience  based on volume and types of loans;  the results of
any independent  review or evaluation of the loan portfolio quality conducted by
or at the direction of Company management or by bank regulatory agencies; trends
in portfolio volume,  maturity, and composition;  off-balance sheet credit risk;
volume  and  trends in  delinquencies  and  nonaccruals;  lending  policies  and
procedures including those for charge-off,  collection,  and recovery;  national
and local economic  conditions and downturns in specific local  industries;  and
the experience,  ability, and depth of lending management and staff. The Company
evaluates  the adequacy of its allowance for possible loan losses on a quarterly
basis.

While  these  factors  cannot  be  reduced  to a  mathematical  formula,  it  is
management's  view that the  allowance for possible loan losses of $4,266,000 or
1.02% of total loans as of December 31, 1997,  was adequate.  This  allowance is
compared to  $3,672,000 or 0.94% in 1996 and  $3,710,000  or 1.23% in 1995.  The
increase in the  allowance  for loan losses as a percentage  of total loans from
1996 to 1997 was due to the  increased  provision  for loan  losses  charged  to
expense in 1997.  This  increase  in the  provision  was due to the  substantial
growth in total loans during 1996 and 1997. Management believes that the quality
of the loan growth coupled with the decrease in nonperforming  loans during this
same period warrants the decrease in the level of the allowance  relative to the
loan portfolio.  There are, however,  no assurances that in any given period the
Company will not sustain  charge-offs  which are  substantial in relation to the
size of the  allowance.  Loans are charged to the  allowance  for possible  loan
losses when the loans are deemed  uncollectible.  It is the policy of management
to make  additions  to the  allowance  so  that it  remains  adequate  to  cover
anticipated losses inherent in the Company's loan portfolio.
<TABLE>
Any allocation or breakdown in the allowance lends an appearance of an exactness
which does not exist. Thus, the allocation below should not be interpreted as an
indication of expected amounts or categories  where  charge-offs will occur. The
allocation  of the  allowance for possible loan losses as of the end of the last
five fiscal years is summarized in the table below:
<CAPTION>
------------------------------------------------------------------------------------------------------------
Allocation of Allowance    1997             1996              1995              1994              1993
------------------------------------------------------------------------------------------------------------
                          Percent of       Percent of        Percent of        Percent of        Percent of
                            loans in         loans in          loans in          loans in          loans in
                                each             each              each              each              each
                            category         category          category          category          category
(Dollars in                 to total         to total          to total          to total          to total
thousands)               $     loans      $     loans       $     loans       $     loans       $     loans
------------------------------------------------------------------------------------------------------------
<S>                <C>       <C>    <C>       <C>     <C>       <C>     <C>       <C>     <C>        <C>
Balance
applicable to:
Commercial         $1,996    26.38% $1,507    29.18%  $1,395    27.45%  $1,607    26.66%  $1,441     24.99%
Real estate -
construction          302     9.98%    218     9.78%     306    10.77%     590    13.55%     229      4.16%
Real estate -
mortgage            1,716    54.22%  1,516    50.27%   1,708    51.37%   1,216    49.83%   1,785     57.82%
Consumer              249     5.89%    286     5.79%     272     8.51%     333     7.89%     269      7.40%
Other                   3     3.53%    145     4.98%      29     1.90%      26     2.07%      28      2.88%
------------------------------------------------------------------------------------------------------------
   Total           $4,266    100.0% $3,672    100.0%  $3,710    100.0%  $3,769    100.0%  $3,753     100.0%
============================================================================================================
</TABLE>

Nonperforming  Loans  Interest  income on the loan  portfolio is recorded on the
accrual basis.  However,  the Company  follows the policy of  discontinuing  the
accrual of interest  income and

                                       52
<PAGE>
<TABLE>
reversing  any accrued and unpaid  interest  when the  payment of  principal  or
interest  is 90 days past due  unless the loan is both well  secured  and in the
process  of  collection.  The  Company's  Lending  Policy  provides  for  strict
requirements  for exempting  loans from  nonaccrual  status.  The composition of
nonperforming  loans as of the end of the last three fiscal years is  summarized
in the following table:
<CAPTION>
--------------------------------------------------------------------------------------
Nonperforming Loans
(In thousands)                                      1997           1996          1995
--------------------------------------------------------------------------------------
<S>                                               <C>            <C>           <C>
Loans accounted for on a nonaccrual basis         $2,150         $1,564        $2,481
Other loans contractually past due 90 days
   or more                                            43             17           261
Restructured loans                                   174            279           513
--------------------------------------------------------------------------------------
      Total                                       $2,367         $1,860        $3,255
======================================================================================
</TABLE>
Loans  accounted  for  on a  nonaccrual  basis  increased  in  1997  due  to  an
Agriculture-related  commercial loan of $779,000 which was placed on non-accrual
status in 1997. Management continues to focus on overall loan quality as well as
to resolve significantly past due loans.

The overall  coverage of the  allowance as a percent of  nonperforming  loans is
180.2%.  The Company's  ratio of  nonperforming  loans to average loans has been
below most industry averages in each year reflected in the table above.

The Company does not expect to sustain  losses in excess of that provided for in
the allowance for possible  loan losses.  At December 31, 1997,  the Company had
$174,000 in loans which were  troubled  debt  restructurings  and which were not
either  nonaccrual  loans or loans  past due 90 days or more and still  accruing
interest.  At December 31,  1997,  the Company did not have any loans other than
those  disclosed as nonaccrual  loans,  loans past due 90 days or more and still
accruing interest and troubled debt restructurings where known information about
possible  credit  problems of the  borrowers  cause  management  to have serious
doubts as to the  ability of such  borrowers  to comply  with the  present  loan
repayment terms.

Investments  The average  balance of Federal Funds Sold  (overnight  investments
with other  banks) and other  short-term  investments  (primarily  money  market
mutual funds) was  $58,359,000 in 1997,  $43,823,000 in 1996, and $42,617,000 in
1995. These  investments are maintained  primarily for the short-term  liquidity
needs of the  Company.  The major  factors  influencing  the levels of  required
liquidity are loan demand of the Company's  customers  and  fluctuations  in the
Company's level of deposits.  The Company's loan to deposit ratio averaged 68.0%
in 1997, compared to 66.2% in 1996, and 67.2% in 1995.

                                       53
<PAGE>

Average total  investment  securities were  $145,430,000 in 1997, an increase of
$15,311,000 over the 1996 average. This increase was the result of the growth in
average  deposits which exceeded the growth in average loans by $23,995,000.  As
of December 31, 1997,  the aggregate  market value of the  investment  portfolio
exceeded the book value by  $2,097,000.  At December  31,  1996,  the book value
exceeded the market value by $223,000.  This increase in the market value of the
portfolio  was the result of  increasing  prices in the bond  market  during the
course of 1997. It is the Company's  policy not to engage in securities  trading
transactions. There are no investments in the portfolio deemed to be permanently
or temporarily impaired.

--------------------------------------------------------------------------------
                                                                      Estimated
                                  Amortized  Unrealized  Unrealized        fair
(In thousands)                         cost        gain        loss       value
--------------------------------------------------------------------------------
1997
--------------------------------------------------------------------------------
Available-for-sale securities:
   U.S. Treasury and agency         $87,591        $698         $42     $88,247
   State and municipal                9,529         115           2       9,642
   Mortgage-backed securities       121,769       1,363          37     123,095
--------------------------------------------------------------------------------
                                   $218,889      $2,176         $81    $220,984
================================================================================
Held-to-maturity securities:
   State and municipal               $4,985         $32         $70      $4,947
   Mortgage-backed securities
      and other                       2,362          43           5       2,400
--------------------------------------------------------------------------------
                                     $7,347         $75         $75      $7,347
================================================================================
1996
--------------------------------------------------------------------------------
Available-for-sale securities:
   U.S. Treasury and agencies       $64,109        $159        $187     $64,081
   State and municipal                7,233          59          21       7,271
   Mortgage-backed securities        45,470           9         303      45,176
--------------------------------------------------------------------------------
                                   $116,812        $227        $511    $116,528
================================================================================
Held-to-maturity securities:
   State and municipal               $6,449         $55         $42      $6,462
   Mortgage-backed securities
      and other                       3,231          59          11       3,279
--------------------------------------------------------------------------------
                                     $9,680        $114         $53      $9,741
================================================================================

Funding  Average total  deposits  increased  $103,120,000  or 20.5% during 1997,
compared to an increase of  $69,858,000  or 16.2% during 1996 and an increase of
$27,928,000 or 6.9% in 1995. Average  non-interest bearing deposits increased in
1997 by  $25,328,000 or 23.1% compared to an increase of $13,791,000 or 14.4% in
1996, and an increase of $8,908,000 or 10.3% in 1995.  Average  interest-bearing
deposits  increased  $77,792,000  or 19.8% in 1997,  compared with  increases of
$56,067,000 or 16.7% in 1996 and $19,020,000 or 6.0% during 1995.  Total deposit
growth in 1998 is expected to continue  but may not increase at the same rate or
in the same  categories.  The Company is able to attract  deposits by  providing
interest rates and services  competitive with other institutions  located in its
market  area.  The  Company  does  not  have  any  brokered  deposits  or  large
concentrations with any one customer.

                                       54
<PAGE>

-------------------------------------------------------------------------------
Average Deposits                      1997            1996            1995
-------------------------------------------------------------------------------
                               Average         Average          Average
(Dollars in thousands)         balance  Rate   balance    Rate  balance   Rate
-------------------------------------------------------------------------------
Demand, noninterest-bearing   $134,943     -  $109,615       -  $95,824      -
Demand, interest-bearing        85,769 0.99%    77,306   1.09%   87,916  1.71%
Savings and money market       169,577 2.86%   168,553   2.77%  140,209  2.79%
Time certificates              214,664 5.43%   146,359   5.32%  108,026  5.10%
-------------------------------------------------------------------------------

The table above sets forth information for the last three fiscal years regarding
the Company's average deposits and the average rates paid on each of the deposit
categories.

The remaining  maturities of the Company's  certificates  of deposit,  including
public  funds,  in amounts of  $100,000  or more as of December  31,  1997,  are
indicated in the table below.  Interest expense on these certificates of deposit
totaled $6,244,000 in 1997.

------------------------------------------------------------------------------
(In thousands)                                                           1997
------------------------------------------------------------------------------
Three month or less                                                   $49,733
Over three through six months                                          32,375
Over six through twelve months                                         33,432
Over twelve months                                                      1,869
------------------------------------------------------------------------------
   Total                                                             $117,409
==============================================================================

Branch  Purchase On November 20, 1997,  First  National Bank  purchased  certain
assets and assumed certain liabilities of the Soledad branch of Bank of America,
NT & SA. As a result of this transaction,  First National assumed $24,694,000 in
deposit  liabilities  and received  $21,449,000  of cash and tangible  assets of
$1,144,000.  The  transaction  resulted in an  intangible  asset of  $2,076,000,
representing  the excess of liabilities  assumed over the fair value of tangible
assets acquired.

Noninterest Income Total noninterest income increased in 1997 to $3,356,000 from
$3,160,000 in 1996.  The increase was  primarily  due to a $187,000  increase in
service  charges  and an  increase  in gains on sales of  securities  of $57,000
partially  offset by a decrease in other income of $43,000.  Noninterest  income
also increased in 1996 by $177,000 as a result of an increase in other income of
$181,000 partially offset by a decrease in gains on sales of loans of $64,000.

                                       55
<PAGE>

Noninterest  Expense In 1997, total other operating  expenses  decreased 8.1% to
$20,884,000, after an increase of $3,375,000 or 17.4% in 1996. Of the $3,375,000
increase in 1996, $1,972,000 was attributable to merger-related  expenses. These
costs were primarily  within the categories of salaries and benefits,  equipment
expense, and legal and professional  expenses.  Salaries and benefits expense in
1997  decreased  $549,000 or 4.6% compared to an increase of $1,875,000 or 18.8%
in 1996. The decrease in salaries and benefits during 1997 was mainly the result
of consolidation of all back-office  operations  following the merger with South
Valley  Bancorporation in 1996. The increase in 1996 over 1995 was primarily due
to the severance costs related to the merger as well as normal salary increases.
As a percentage of average  earning  assets,  salaries and benefits were 1.8% in
1997  compared to 2.3% for 1996 and 1995.  The Company  employed  285  full-time
equivalent employees at year-end 1997.

Occupancy expense increased $215,000 or 10.2% in 1997 compared to an increase of
$152,000 or 7.8% in 1996.  The  increases in 1997 and 1996 were due primarily to
the expansion of the Salinas  office of First National Bank in 1996, the leasing
of additional space to house the Loan Administration  center in 1997, and normal
rental rate increases.
<TABLE>
All other operating  expenses totaled  $7,243,000 in 1997 compared to $8,752,000
in 1996,  a decrease of  $1,509,000  or 17.2%.  This  decrease was mainly due to
merger-related  expenses for data  processing  and legal and  professional  fees
which were  incurred in 1996.  In 1996,  other  operating  expense  increased by
$1,348,000  or 18.2% over 1995,  again,  the result of  merger-related  costs in
1996.  The major  components of other expenses in dollars and as a percentage of
average earning assets are as indicated in the table below.
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Other Expenses                       1997                      1996                         1995
-------------------------------------------------------------------------------------------------------------
                                          Percentage                  Percentage                  Percentage
                                          of average                  of average                  of average
(Dollars in thousands)         Amount earning assets     Amount   earning assets      Amount  earning assets
-------------------------------------------------------------------------------------------------------------
<S>                           <C>              <C>      <C>                <C>        <C>              <C>
Salaries and benefits         $11,315          1.83%    $11,864            2.34%      $9,989           2.29%
Occupancy                       2,326          0.38%      2,111            0.42%       1,959           0.45%
Equipment                       1,755          0.29%      2,577            0.51%       1,943           0.45%
Advertising and promotion         864          0.14%        710            0.14%         659           0.15%
Forms and supplies                767          0.12%        563            0.11%         508           0.12%
Legal and professional fees     1,185          0.19%      1,946            0.38%         823           0.19%
Assessments                       222          0.04%        147            0.03%         572           0.13%
Other                           2,450          0.40%      2,809            0.56%       2,899           0.65%
-------------------------------------------------------------------------------------------------------------
 Total                        $20,884          3.39%    $22,727            4.49%     $19,352           4.43%
=============================================================================================================
</TABLE>

Year 2000

During 1997,  the Company began the  implementation  of its Year 2000 Plan.  The
Year 2000 problem,  also known as the "Millenium  Bug" was created when software
engineers, in an attempt to save processing speed and hard disk storage, decided
to create a two-digit  year field within a date field instead of four.  This was
done to save on disk space and to maximize  processing speed. The two-digit year
does not allow the software to  determine if '00' is the year 1900 or 2000.  The
year 2000 issue is very  pervasive  and  complex  as  virtually  every  computer
operation  will be affected in some way by the rollover of the date from 1999 to
2000.

                                       56
<PAGE>

The Company is using both internal and external  resources to identify,  correct
or reprogram and test the systems for year 2000  compliance.  It is  anticipated
that all  reprogramming  efforts or system  changes will be complete by December
31, 1998, allowing adequate time for testing.  To date,  confirmations have been
received from the Company's  primary  processing  vendors that their systems are
year 2000 compliant.  Based on a preliminary study, the Company expects to spend
approximately  $150,000  over the next two years to modify and test its computer
systems  to allow for  transactions  in the year  2000 and  beyond.  The  amount
expensed in 1997 was not significant.


Income Taxes

The provision for income taxes was $6,635,000 in 1997, compared to $4,348,000 in
1996 and  $4,200,000  in 1995.  The  Company's  effective  tax rate for 1997 was
39.5%, compared with 41.9% for 1996, and 38.9% for 1995. The increased effective
tax rate in 1996 was due to the fact that a majority of the merger-related costs
were not tax-deductible.

Capital

Shareholders'  equity  increased  $8,912,000 or 14.0% in 1997.  The increase was
primarily  a result  of  retention  of the  Company's  1997 net  income  and the
exercise of stock options,  offset in part by a repurchase of outstanding shares
and a total cash  dividend  of $0.66 per share paid  during  1997.  The  Company
regularly  assesses  future  capital  needs so that it will remain in compliance
with the capital  adequacy  guidelines  issued by the Federal  Reserve Board for
bank holding companies and by the Office of the Comptroller of the Currency (the
"OCC") for national banks.  The Company's  operating plan for 1998  contemplates
continued growth in shareholders' equity through the retention of net income.

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

                                       57
<PAGE>

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

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

The federal  banking  agencies  have issued a joint  advance  notice of proposed
rulemaking  to solicit  comments on a framework  for revising  their  risk-based
capital  guidelines  to take account of interest  rate risk.  As required by the
Federal Deposit  Insurance  Corporation  Improvement  Act of 1991 (FDICIA),  the
notice seeks comment on a proposed method of incorporating an interest rate risk
component  into the  current  risk-based  capital  guidelines,  with the goal of
ensuring  that  institutions  with  high  levels  of  interest  rate  risk  have
sufficient capital to cover their exposures.  Interest rate risk is a measure of
the  relationship  between a change in market  interest  rates and the resultant
change  in  net  interest   income  due  to  the   repricing   and/or   maturity
characteristics  of the assets and  liabilities  of the  Company.  As  financial
intermediaries,  depository  institutions  accept interest rate risk as a normal
part of their  business.  They  assume  this risk  whenever  the  interest  rate
sensitivity of their assets does not match the sensitivity of their  liabilities
or off  balance  sheet  positions.  Thus,  when  interest-sensitive  assets  and
liabilities reprice at mismatched intervals, an increase or decrease in interest
rates will affect net interest  income.  Under the proposal,  interest rate risk
exposures  would be quantified by weighing  assets,  liabilities and off-balance
sheet items by risk  factors  which  approximate  sensitivity  to interest  rate
fluctuations.  Institutions  identified as having an interest rate risk exposure
greater  than a defined  threshold  would be  required  to  allocate  additional
capital to support  this higher  risk.  The capital to be  allocated  would be a
dollar  amount  equal to the  percentage  by which the risk  exceeds the defined
threshold  multiplied  by the  institution's  total  assets.  Higher  individual
capital   allocations  could  be  required  by  the  bank  regulators  based  on
supervisory concerns.

Federal banking  agencies have solicited  comments on this proposal but have not
yet proposed  regulations to implement any interest rate risk component into the
risk-based  capital  guidelines.


                                       58
<PAGE>

Accordingly,  the ultimate  impact on the Subsidiary  Banks and the Company of a
final regulation in this area cannot be predicted at this time.

Leverage Capital Guidelines

The Federal Reserve Board and the OCC have  established a minimum leverage ratio
of 3% Tier 1 capital to total  assets for bank  holding  companies  and national
banks that have  received the highest  composite  regulatory  rating and are not
anticipating or experiencing any significant growth. All other institutions will
be  required to  maintain a leverage  ratio of at least 100 to 200 basis  points
above the 3% minimum.
<TABLE>
Set forth below are the  Company's  and the  Subsidiary  Banks'  risk-based  and
leverage capital ratios as of December 31, 1997:
<CAPTION>
---------------------------------------------------------------------------------------------------
Risk Based Capital Ratio
As of December 31, 1997
---------------------------------------------------------------------------------------------------
                                    Company               South Valley           First National
(Dollars in thousands)          Amount      Ratio     Amount         Ratio    Amount         Ratio
------------------------------------------------------------------------------------- -------------
<S>                            <C>         <C>       <C>            <C>      <C>            <C>
Tier 1 capital                 $68,925     13.58%    $17,592        11.71%   $44,601        12.81%
Tier 1 capital minimum
   requirement                  20,295      4.00%      6,009         4.00%    13,929         4.00%
---------------------------------------------------------------------------------------------------
      Excess                    48,630      9.58%     11,583         7.71%    30,672         8.81%
===================================================================================== =============
Total capital                   73,191     14.43%     19,337        12.87%    47,116        13.53%
Total capital minimum
    requirement                 40,589      8.00%     12,017         8.00%    27,858         8.00%
------------------------------------------------------------------------------------- -------------
      Excess                    32,602      6.43%      7,320         4.87%    19,258         5.53%
===================================================================================== =============
Risk-adjusted assets          $507,363              $150,216                $348,220
===================================================================================== =============
</TABLE>
<TABLE>
As indicated in the table on the previous  page,  the Company's  capital  ratios
significantly  exceeded the minimum  capital levels  required by current federal
regulations.  Management believes that the Company and the Subsidiary Banks will
continue  to  meet  their  respective   minimum  capital   requirements  in  the
foreseeable future.
<CAPTION>
----------------------------------------------------------------------------------------------------------
Leverage Capital Ratio
As of December 31, 1997
----------------------------------------------------------------------------------------------------------
                                           Company               South Valley            First National
(Dollars in thousands)               Amount       Ratio      Amount         Ratio       Amount      Ratio
----------------------------------------------------------------------------------------------------------
<S>                                 <C>           <C>       <C>             <C>        <C>          <C>
Tier 1 capital to quarterly
 average total assets
  (leverage ratio)                  $68,925       9.17%     $17,592         8.03%      $44,601      8.49%
Minimum leverage requirement      22,543 to    3.00% to    6,575 to      3.00% to    15,761 to   3.00% to
                                     37,572       5.00%      10,958         5.00%       26,268      5.00%
----------------------------------------------------------------------------------------------------------
      Excess                      31,353 to    4.17% to    6,634 to      3.03% to    18,333 to   3.49% to
                                     46,382       6.17%      11,017         5.03%       28,840      5.49%
==========================================================================================================
Total quarterly average assets     $751,439                $219,168                   $525,357
==========================================================================================================
</TABLE>

                                       59
<PAGE>

Federal  banking  laws  impose  restrictions  upon the amount of  dividends  the
Subsidiary  Banks  may  declare  to the  Holding  Company  (see  Note  14 to the
accompanying  consolidated  financial  statements).  Federal  laws  also  impose
restrictions  upon the amount of loans or advances that the Subsidiary Banks may
extend to the Holding Company. In management's opinion,  these do not affect the
ability of the Company to meet its cash obligations.


Liquidity

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

The Company's  principal sources of asset liquidity are cash and due from banks,
time deposits with other financial institutions,  federal funds sold, short-term
investments, and marketable investment securities. As of December 31, 1997 these
sources represented  $306,850,000 or 44.9% of total deposits,  compared to 37.0%
in 1996 and 44.1% in 1995.  The decrease in 1996  reflects the growth within the
loan  portfolio  of  which a small  portion  was  funded  by  maturities  in the
investment  portfolio.  Other sources of asset  liquidity are maturing loans and
borrowing lines of approximately  $51,000,000 with primary  correspondent banks.
There were no borrowings outstanding under these lines as of December 31, 1997.

The Company  guarantees  the  obligations  or  performance  of its  customers by
issuing  standby  letters of credit to a third party.  These standby  letters of
credit are  frequently  issued in support of  third-party  obligations,  such as
retail company transactions and travel agency issuances.

The risk involved in issuing  standby  letters of credit is essentially the same
as the credit risk in extending loans to customers,  and they are subject to the
same credit  origination,  maintenance,  and management  procedures in effect to
monitor  other credit  products.  As of December 31, 1997 and 1996,  outstanding
standby letters of credit totaled $4,193,000 and $4,994,000,  respectively.  The
Company does not offer or engage in any other off-balance sheet products such as
commitments  to purchase and sell foreign  exchange,  interest  rate or currency
swaps, or financial futures and options.

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

                                       60
<PAGE>

Effects of Changing Prices

The most direct  effect of  inflation is higher  interest  rates.  However,  the
Company's  earnings  are not  necessarily  dependent  on the  absolute  level of
interest rates.  Instead,  earnings are affected by the spread between the yield
on loans and investments and the cost of deposits and borrowing  money.  Another
effect of inflation is upward pressure of the Company's operating  expenses.  It
is  management's  opinion  that the  effects of  inflation  on the  consolidated
financial statements have not been material.

Quantitative and Qualitative Disclosures about Market Risk

The Company's  success is largely  dependent upon its ability to manage interest
rate risk.  Interest  rate risk can be defined as the exposure of the  Company's
net interest income to adverse movements in interest rates. Although the Company
manages other risks,  as in credit and  liquidity  risk, in the normal course of
its business, management considers interest rate risk to be its most significant
market  risk and  could  potentially  have the  largest  material  effect on the
Company's  financial  condition.  The primary  objective of the  asset/liability
management  process is to measure the effect of changing  interest  rates on net
interest  income and market value and adjust the balance sheet (if necessary) to
minimize the inherent risk and maximize income. The Company's exposure to market
risk  and   interest   rate  risk  is  reviewed  on  a  regular   basis  by  the
Asset/Liability  Committee.  Tools used by  management  include a  modified  GAP
report and an  asset/liability  simulation model.  Management  believes that the
Company's  market risk and interest  rate risk  profiles  are within  reasonable
tolerances at this time.

         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.

         The table on the following page  represents the change in the Company's
Market Value of Portfolio  Equity  (MVPE) at December 31, 1997 in the event of a
sudden and sustained  change in interest rates as presented.  MVPE is defined as
the fair value of assets  less the fair value of  liabilities  on the  Company's
consolidated balance sheet.

                                       61
<PAGE>


(Dollars in thousands)           Market value of
Change in interest rates        portfolio equity      $ Change    % Change
---------------------------------------------------------------------------
200 Basis points rise                    $90,811          $755       0.84%
100 Basis points rise                     90,434           378       0.42%
Base scenario                             90,056             -       0.00%
100 Basis points decline                  88,950       (1,107)     (1.23%)
200 Basis points decline                  87,873       (2,213)     (2.46%)



                                       62
<PAGE>


                     PACIFIC CAPITAL BANCORP STOCK ACTIVITY

The common  stock of the Company is listed on the NASDAQ  National  Market under
the symbol PABN.  This listing became  effective on November 20, 1996.  Prior to
that date, the Company's common stock was listed on the OTC Bulletin Board.

The high and low prices listed below reflect actual trades which occurred in the
specified time frames listed.  Three brokerage firms effect  transactions in the
Company's stock: Van Kasper & Co., Sandler O'Neill Partners,  L.P.; and Hoefer &
Arnett, Inc.

According  to  the  Company's  records,  there  were  2,063  shareholders  as of
September 10, 1996.  In 1997 the Company paid four cash  dividends of $0.165 per
share to holders of record on March 14, June 16,  September 15, and November 17,
payable on March 31, June 30, September 30, and December 1, 1996,  respectively.
The Company also paid a five percent (5%) stock dividend payable to shareholders
of record as of December 1, 1997.

For information  regarding  restrictions on the payment of dividends see Note 14
to the accompanying consolidated financial Statements.

--------------------------------------------------------------------------------
                          Ranges of Common Stock Prices
--------------------------------------------------------------------------------
                                   1997
--------------------------------------------------------------------------------
Quarter                                                         Low        High
-------------------------------------------------------------------------------
First                                                        $23.10      $27.62
Second                                                        27.02       33.93
Third                                                         30.60       33.10
Fourth                                                        32.74       44.25
-------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                                   1996
--------------------------------------------------------------------------------
Quarter                                                         Low        High
-------------------------------------------------------------------------------
First                                                        $24.05      $28.09
Second                                                        25.47       27.63
Third                                                         24.77       26.67
Fourth                                                        25.38       27.63
-------------------------------------------------------------------------------


                                       63
<PAGE>

                                 The Corporation

The  Company is a  California  corporation  and bank  holding  company  that was
incorporated on January 26, 1983. First National and South Valley,  wholly owned
subsidiaries   of  the  Company,   commenced   operations   in  1984  and  1983,
respectively.
<TABLE>

First  National  and South  Valley are  nationally  chartered  commercial  banks
serving  Monterey,   Santa  Cruz,  Santa  Clara  and  San  Benito  Counties  and
surrounding areas in California.
<CAPTION>
                                                            Registrar & Transfer Agent   Form 10-K
First National Bank of        South Valley                  --------------------------   ----------------------------
Central California            National Bank                 ChaseMellon Shareholder      A Copy of the Company's
Banking Offices               Banking Offices               Services                     Form 10-K as filed with the
----------------------------- ----------------------------- Overpeck Centre              Securities and Exchange
<S>                           <C>                           <C>                          <C>
1001 South Main Street        500 Tennant Station           85 Challenger Road           Commission is available,
Salinas, California           Morgan Hill, California       Ridgefield Park, NJ          without charge, upon
93902-1786                    95037                         07660                        written request.
(408) 757-4900                (408) 778-1510                                             Please direct requests to:

495 Washington Street         8000 Santa Teresa Blvd.       Market Makers                Dennis A. DeCius
Monterey, California          Gilroy, California            Hoefer & Arnett, Inc.        Executive Vice President
93942-2718                    95020                         353 Sacramento Street        Chief  Financial Officer
(408) 373-4900                (408) 848-2161                Tenth Floor                  Pacific Capital Bancorp
                                                            San Francisco, California    P.O. Box 1786
307 Main Street               1730 Airline Highway          94111                        Salinas, California
Salinas, California           Hollister, California                                      93902-1786
93902-1786                    95023                         Sandler O'Neill Partners,
(408) 757-4900                (408) 636-5581                LP
                                                            2 World Trade Center         Corporate Counsel
                                                            104th Floor                  Preston, Gates & Ellis LLP
655 Main Street               301 Third Street              New York, New York           One Maritime Plaza
Watsonville, California       San Juan Bautista, Ca.        10048                        Suite 2400
95077-1540                    95045                                                      San Francisco, California
(408) 728-2265                (408) 623-4590                Van Kasper & Co.             94111
                                                            600 California Street
26380 Carmel Rancho Lane                                    Suite 1700                   Certified Public
Carmel, California                                          San Francisco, California    Accountants
93922-2017                                                  94108                        KPMG Peat Marwick LLP
(408) 626-2900                                                                           500 East Middlefield Road
                                                                                         Mountain View, California
695 Front Street                                                                         94043
Soledad, California
93960
(408) 678-2609

</TABLE>

                                       64
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant had duly caused this report to be signed on
its behalf of the undersigned, thereunto duly authorized.


Date:  March 25, 1998                                PACIFIC CAPITAL BANCORP
       -------------------------------------



                                                     By:  /S/ Clayton C. Larson
                                                     CLAYTON C. LARSON
                                                     President



  /S/ Charles E. Bancroft                            Date:        March 25, 1998
--------------------------------------------
Charles E. Bancroft,
Director



  /S/ Dennis A. DeCius                               Date:        March 25, 1998
--------------------------------------------
Dennis A. DeCius
Executive Vice President
and Chief Financial Officer
(principal financial officer and principal accounting officer)



  /S/ Gene DiCicco                                   Date:        March 25, 1998
--------------------------------------------
Gene DiCicco,
Director



  /S/ Lewis L. Fenton                                Date:        March 25, 1998
--------------------------------------------
Lewis L. Fenton,
Director


                                       65
<PAGE>



  /S/ James L. Gattis                                Date:        March 25, 1998
--------------------------------------------
James L. Gattis,
Director and Secretary


  /S/ Hubert W. Hudson                               Date:        March 25, 1998
--------------------------------------------
Hubert W. Hudson,
Director


 /S/ William H. Pope                                 Date:        March 25, 1998
--------------------------------------------
William H. Pope,
Director


 /S/ William J. Keller                               Date:        March 25, 1998
--------------------------------------------
William J. Keller,
Director


 /S/ Eugene R.Guglielmo                              Date:        March 25, 1998
 -------------------------------------------
Eugene R. Guglielmo,
Director


/S/ Roger C. Knopf                                   Date:        March 25, 1998
--------------------------------------------
Roger C. Knopf,
Director



  /S/ Clayton C. Larson                              Date:        March 25, 1998
--------------------------------------------
Clayton C. Larson,
President and Director



  /S/ William S. McAfee                              Date:        March 25, 1998
--------------------------------------------
William S. McAfee,
Director

                                       66
<PAGE>


  /S/ Robert B. Sheppard                             Date:        March 25, 1998
--------------------------------------------
Robert B. Sheppard,
Director



 /S/ Mary Lou Rawitser                               Date:        March 25, 1998
--------------------------------------------
Mary Lou Rawitser,
Director




                                       67
<PAGE>

                                INDEX TO EXHIBITS

Exhibit                                                             Sequentially
Number                              Exhibit                        Numbered Page
------                              -------                        -------------

  3.1   Articles of incorporation of the Company as amended.  1/         (*)

  3.2   Bylaws of Company as amended.  2/                                (*)

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

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

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

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

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

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

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

*/     Not Applicable.


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

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

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

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

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

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



                                       68
<PAGE>

Exhibit                                                             Sequentially
Number                            Exhibit                          Numbered Page
------                            -------                          -------------

 10.8     Matrix Funding Corporation Master Lease Agreement. 1/         (*)

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

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

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

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

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

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

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

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

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

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

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


                                       69
<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 10.23 through 10.34 to the Company's Annual Report on
         Form 10-K (File No.  0-13528)  for the fiscal year ended  December  31,
         1991, which are incorporated by reference.

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



                                       70
<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/

 10.40    Asset/Liability Management Software Agreement dated            (*)
          December 31, 1993 by and between First National Bank of
          Central California and Profitstar, Inc. 10/

 10.41    Applications  dated  December 28, 1993 by First                (*)
          National Bank of Central California to become a member
          of the California Bankers Clearing House Association. 10/

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

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

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

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

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

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

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

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

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

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

                                       71
<PAGE>

Exhibit                                                             Sequentially
Number                              Exhibit                        Numbered Page
------                              -------                        -------------

 10.51   Standard Form of Agreement between Owner (Pacific              (*)
         Capital Bancorp)  and Contractor (Daniels & House
         Construction Co.) for the renovation of existing
         building and construction of new addition for
         First National Bank of Central California at
         1001 S. Main Street, Salinas, CA, 93901, dated
         June 15, 1995. 11/

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

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

 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/

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

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.

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.


                                       72
<PAGE>


Exhibit                                                             Sequentially
Number                         Exhibit                             Numbered Page
------                         -------                             -------------


  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/

  10.66   Purchase and Assumption dated September 18, 1997 between First
          76 National Bank of Central California and Bank of America, NT
          & SA



   13.    Pacific Capital Bancorp 1997 Annual Report to Shareholders ---
          (parts  not   incorporated  by  reference  are  furnished  for
          informational purposes only and are not filed herewith).

   21.    Subsidiaries of the Company                                     141

   23.    Opinion of KPMG Peat Marwick LLP                                65

   24.    Consent of KPMG Peat Marwick LLP                                66

   27.    Financial Data Schedule                                         142

-----------

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.


                                       73