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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended March 31, 2005

OR

For the transition period from              to             

Commission File No.: 0-11113

PACIFIC CAPITAL BANCORP

(Exact Name of Registrant as Specified in its Charter)

(805) 564-6405

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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

Common Stock - As of May 5, 2005 there were 45,825,993 shares of the issuer’s common stock outstanding.

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PART 1 FINANCIAL INFORMATION

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PACIFIC CAPITAL BANCORP & SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

(dollars and share amounts in thousands except per share amounts)

The accompanying notes are an integral part of these consolidated financial statements.

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PACIFIC CAPITAL BANCORP & SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

(dollars and share amounts in thousands except per share amounts)

The accompanying notes are an integral part of these consolidated financial statements.

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PACIFIC CAPITAL BANCORP & SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)

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PACIFIC CAPITAL BANCORP & SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(dollars in thousands)

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PACIFIC CAPITAL BANCORP AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements

March 31, 2005

(Unaudited)

Consolidation and Basis of Presentation

The consolidated financial statements include the parent holding company, Pacific Capital Bancorp (“Bancorp”), and its wholly owned subsidiaries, Pacific Capital Bank, N.A. (the “Bank” or “PCBNA”), two service corporations, and two securitization subsidiaries. The activities of one of the service corporations are minimal; the other is inactive. The securitization subsidiaries are or have been used for the transactions described in Note 8, “Transfers and Servicing of Financial Assets.” One is used only in the first quarter of each year and the other is currently inactive. All references to the “Company” apply to Pacific Capital Bancorp and its subsidiaries. “Bancorp” will be used to refer to the parent company only. Material intercompany balances and transactions have been eliminated.

On March 5, 2004, the Company acquired Pacific Crest Capital, Inc. (“PCCI”) and its wholly owned subsidiaries, Pacific Crest Bank, Pacific Crest Capital Trust I (“PCC Trust I”), Pacific Crest Capital Trust II (“PCC Trust II”), and Pacific Crest Capital Trust III (“PCC Trust III”). PCCI was merged into Bancorp, while Pacific Crest Bank was merged into PCBNA. PCC Trust I, PCC Trust II, and PCC Trust III were created by PCCI for the exclusive purpose of issuing trust preferred securities. These three entities remain stand-alone subsidiaries of Bancorp but are not consolidated in the Company’s financial statements (see “Variable Interest Entities” in this Note regarding the nonconsolidation of these subsidiaries and Note 2, “Business Combinations” for more information on the PCCI acquisition).

PCBNA uses the brand names of “Santa Barbara Bank & Trust,” “First National Bank of Central California,” “South Valley National Bank,” and “San Benito Bank” in its various market areas. “Bank” also includes the operations of Pacific Crest Bank, which was merged into PCBNA as part of the March 5, 2004 acquisition of PCCI. The Bank uses the brand name “Pacific Capital Bank” for the operations acquired with PCCI.

The accompanying unaudited consolidated financial statements have been prepared in a condensed format, and therefore do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. In the opinion of Management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair statement have been reflected in the financial statements. However, the results of operations for the three-month period ended March 31, 2005 are not necessarily indicative of the results to be expected for the full year.

Cash and Cash Equivalents

For the purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, money market funds, Federal funds sold, and securities purchased under agreements to resell.

Securities

Securities may be classified as either “held-to-maturity” or “available-for-sale.” Securities for which an investor has positive intent and ability to hold until maturity are classified as held-to-maturity. Securities that might be sold prior to maturity because of interest rate changes, to meet liquidity needs, or to better match the repricing characteristics of funding sources are classified as available-for-sale. If an investor were to purchase securities principally for the purpose of selling them in the near term, they would be classified as trading securities. The Company holds no securities that should be classified as trading securities and has decided that all securities could be sold for any of the reasons noted above. Consequently, it classifies all securities as available-for-sale. On determining gain or loss on securities, cost is determined by specific identification.

A Security is impaired if its fair value is less than its cost adjusted for accretion of discount or amortization of premium. In the last several months, there have been extensive discussions by accounting authorities regarding securities that might be other than temporarily impaired. This issue is discussed in the sub-section of this note titled, “New Accounting

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Pronouncements.” The Company has not purchased any securities arising out of highly leveraged transactions, and its investment policy prohibits the purchase of any securities of less than investment grade.

Loans

Nonaccrual Loans—When a borrower is not making payments as contractually required by the note, the Company must decide whether it is appropriate to continue to accrue interest income. Generally, the Company stops accruing interest when the loan has become delinquent by more than 90 days, or in the case of individually analyzed large loans, when either an event of default has occurred or when analysis suggests that it is unlikely that the obligor will continue to pay according to the agreed terms of the credit.

Neither delinquency or default is a requirement for nonaccrual status. Once reasonable doubt about the collectibility exists, the loan is put on nonaccrual. In the case of consumer loans, it is usually an event of delinquency or default that raises the doubt of collectibility, but in the case of commercial loans, doubt may be raised by other events. For example, the financial statements required of these borrowers may show a deterioration in their financial condition or a borrower may begin borrowing under a line of credit to make payments on another loan.

Impaired Loans—Specific kinds of loans are identified as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreements. Because this definition is very similar to that used by Management to determine on which loans interest should not be accrued, the Company expects that most impaired loans will be on nonaccrual status. Therefore, in general, the accrual of interest on impaired loans is discontinued, and any uncollected interest is written off against interest income in the current period. No further income is recognized until all recorded amounts of principal are recovered in full or until circumstances have changed such that the loan is no longer regarded as impaired.

Impaired loans are reviewed each quarter or upon receipt of material information, to determine whether a valuation allowance for loan loss is required. The amount of the valuation allowance for impaired loans is determined by comparing the recorded investment in each loan with its value measured by one of three methods. The first method is to estimate the expected future cash flows and then discount them at the effective interest rate of the loan. The second method is to use the loan’s observable market price if the loan is of a kind for which there is a secondary market. The third method is to use the value of the underlying collateral. A valuation allowance is established for any amount by which the recorded investment exceeds the value of the impaired loan. If the value of the loan as determined by the selected method exceeds the recorded investment in the loan, and certain other factors suggest that the recorded investment is or would be reasonably realizable within the contractual term of the loan or within a reasonable period of time using methods available to the bank, then no valuation allowance for that loan is established.

GAAP recognizes that some impaired loans may have risk characteristics that are unique to the individual borrower while others may share common risk characteristics. In the former case, the creditor is expected to apply the measurement methods mentioned in the preceding paragraph on a loan-by-loan basis. In the latter case, the creditor is allowed to aggregate those loans and use historical statistics in measuring the amount of the valuation allowance needed. Because the loans currently identified as impaired by the Company have unique risk characteristics, the valuation allowance disclosed in Note 5, “Loans and the Allowance for Credit Losses,” for impaired loans is determined on a loan-by-loan basis.

The amount of impaired loans and the allowance provided for them are disclosed in Note 5.

Allowance for Other Loans—The Company also provides an allowance for credit losses for other loans. These include: (1) groups of loans for which the allowance is determined by historical loss experience ratios for similar loans; (2) specific loans that are not included in one of the types of loans covered by the concept of “impairment” but for which repayment is nonetheless uncertain; and (3) probable losses incurred in the various loan portfolios, but which have not been specifically identified as of the period end. The amounts of the various components of the allowance for credit losses are based on review of individual loans, historical trends, current economic conditions, and other factors. This process is explained in detail in the notes to the Company’s Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2004 (“2004 10-K”).

Loans that are deemed to be uncollectible are charged-off against the allowance for credit losses. Uncollectibility is determined based on the individual circumstances of the loan and historical trends. Additions and reductions to the allowance for credit loss for the three month periods ended March 31, 2004 and 2005, and the balances as of those dates are disclosed in Note 5.

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Origination Fees—The Company defers and amortizes loan fees collected and origination costs incurred over the lives of the related loans. For each category of loans, the net amount of the unamortized fees and costs are reported as a reduction or addition, respectively, to the balance reported. Because the fees collected are generally less than the origination costs incurred for consumer loans, the total net deferred or unamortized amount for this category is an addition to the loan balances.

Other Assets

Property acquired as a result of defaulted loans is included within other assets on the balance sheets. Property from defaulted loans is carried at the lower of the outstanding balance of the related loan at the time of foreclosure or the estimate of the market value of the assets less disposal costs. During the second quarter of 2004, the Company received a real estate property in satisfaction of a delinquent loan. The property was recorded at an estimate of its fair value less cost of disposal, $2.9 million. As of March 31, 2005, the Company still held the $2.9 million property.

Goodwill and Other Intangible Assets

Goodwill is recorded on the balance sheets in connection with acquisitions of other financial institutions. The Company recognized the excess of the purchase price over the estimated fair value of the assets received and liabilities assumed as goodwill. The goodwill recognized in connection with the March 5, 2004 PCCI acquisition is recorded in the “Pacific Capital” segment on the tables included in Note 14, “Segment Disclosure, “ while the remainder of the Company’s goodwill is recorded within the “Community Banking” segment.

Customer deposits with financial institutions—especially the deposits other than certificates—are generally the result of long-term customer relationships. These deposits are therefore more valuable to a purchaser than simply their outstanding amount would indicate because financial institutions have to spend marketing and other acquisition costs to generate these customer relationships. Therefore, when deposits are purchased, the seller demands an acquisition cost representing the value of the relationship. In the sale of deposits, because the buyer is actually assuming a liability from the seller, this acquisition cost is represented by the amount that the liability assumed exceeds the cash paid by the seller to the buyer to assume the liability. This acquisition cost is termed a Core Deposit Intangible (“CDI”). The Company records this CDI as an asset and amortizes it against other expense over the expected average life of the deposit relationships acquired. For any particular acquisition, the amount of the CDI and the expected average life of the relationship will differ depending on the nature of the deposits and the customers.

Intangible assets, including goodwill, have been and will be reviewed each year to determine if circumstances related to their valuation have been materially affected. In the event that the current market values are determined to be less than the current book values (impairment), a charge against current earnings will be recorded. No such impairment existed at March 31, 2005 or December 31, 2004.

See Note 2, “Business Combinations,” for information regarding the March 5, 2004 acquisition of PCCI.

Loan Sales and Loan Servicing Rights

The Company sells some of the residential real estate loans that it originates. Whether it sells loans during any particular period and how much are sold depends on a number of factors, including the Company’s interest rate risk profile, the fees and gains available from selling, the amount of loans originated, and the coupon rates. Some of the residential loans sold are sold “servicing released” and the purchaser takes over the collection of the payments. However, most are sold with “servicing retained” and the Company continues to receive the payments from the borrower and forwards the funds to the purchaser. The Company earns a fee for this service. The sales are made without recourse, that is, the purchaser cannot look to the Company as a source of repayment in the event the borrower does not perform according to the terms of the note. GAAP requires companies engaged in mortgage banking activities to recognize the rights to service mortgage loans for others as separate assets. For loans sold, a portion of the investment in the loan is allocated to the right to receive this fee for servicing and this value is recorded as a separate asset. This allocation is based on an estimate of the fair value of the servicing rights.

The Company originates some of the SBA loans with the intention of selling the guaranteed portion. As with the residential loans that are sold, these loans are sold promptly after origination. The Company does not hold them for some period of time

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to assemble groups or pools for sale. Consequently, the amount at any particular time and any adjustment to the market value from changes in interest rates are immaterial.

Rent Expense

Most of the leases on the buildings the Company rents provide for periodic “cost of living” rent increases based on the consumer price index. However, some provide for either fixed dollar or minimum percentage increases. For these latter leases, as required by GAAP, the monthly rent expense is computed by dividing the total minimum rent to be paid over the term of the lease by the number of months in the term. During the early years of the lease term, rent expense will be more than the monthly payment and a liability will be recognized. During the later years of the lease term, the payment will be more than the rent expense recognized and the liability will be gradually reduced to zero at the end of the lease term.

Comprehensive Income

The balances in the equity accounts of the Company are impacted by transactions with shareholders. These impacts would include increases from the sale of new stock or the issuance of new stock upon the exercise of stock options. They would also include decreases arising from distributions to shareholders in the form of either dividends or share repurchases. Changes in the equity accounts other than those changes resulting from investments by owners and distributions to owners are called comprehensive income. Net income is the primary component of comprehensive income. For the Company, the only component of comprehensive income other than net income is the unrealized gain or loss on securities classified as available-for-sale. The aggregate amount of such changes to equity that have not yet been recognized in net income are reported in the equity portion of the Consolidated Balance Sheets net of income tax effect as “Accumulated other comprehensive income.”

When an available-for-sale security is sold, a realized gain or loss will be included in net income and, therefore, in comprehensive income. Consequently, the recognition of any unrealized gain or loss for that security that had been included in comprehensive income in an earlier period must be reversed in the current period to avoid including it twice. These adjustments are reported in the Consolidated Statements of Comprehensive Income as a reclassification adjustment for gains or losses included in net income.

Segment Disclosure

While the Company’s products and services are all of the nature of commercial banking, the Company has six reportable segments. There are five specific segments: “Community Banking,” “Commercial Banking,” “Refund Programs,” “Fiduciary,” and “Pacific Capital.” The remaining activities of the Company are reported in a segment titled “All Other.”

Information regarding how the Company determines its segments is provided in Note 26, “Segment Reporting,” to the Consolidated Financial Statements included in the Company’s 2004 10-K. This information includes descriptions of the factors used in identifying these segments, the types and services from which revenues for each segment are derived, charges and credits for funds obtained from or provided to other segments, and how the specific measure of profit or loss was selected. Readers of these interim statements are referred to that information to better understand the disclosures for each of the segments in Note 14, “Segment Disclosure.” There have been no changes in the basis of segmentation or in the measurement of segment profit or loss from the description given in the 2004 10-K.

Stock-Based Compensation

GAAP permits the Company to use either of two methods for accounting for compensation cost in connection with employee stock options. The first method—termed the “fair value” method—requires issuers to record compensation expense over the period the options are expected to be outstanding prior to exercise, expiration, or cancellation. The amount of compensation expense to be recognized over this term is the “fair value” of the options at the time of the grant as determined by an option pricing model. The option pricing model computes fair value for the options based on the length of their term, the volatility of the stock price in past periods, and other factors. Under this method, the issuer recognizes compensation expense regardless of whether the officer or director eventually exercises the options.

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The second method is termed the “intrinsic value” method. Under this accounting method, if options are granted at an exercise price equal to the market value of the stock at the time of the grant, no compensation expense is recognized. GAAP requires that issuers that elect the second method must present pro forma disclosures of net income and earnings per share as if the first method had been elected. The Company uses this second method.

Had the Company recognized compensation expense over the expected life of the options based on the fair value method as discussed above, the Company’s pro forma salary expense, net income, and earnings per share for the three month periods ended March 31, 2005 and 2004 would have been as follows:

For purposes of the 2005 computation, the significant assumptions used, computed on a weighted average basis, were:

For purposes of the 2004 computation, the significant assumptions used, computed on a weighted average basis, were:

For the first quarters of 2005 and 2004, had the Company elected the first method of accounting for its stock options, the impact would be to lower its net income by 0.51% and 0.28%, respectively, and fully diluted earnings per share by 0.77% and 0.0%, respectively. Options are granted to directors and certain officers of the Company by authorization of the Compensation Committee of the Board. Throughout the year, stock options may be issued to new directors and new and promoted employees depending on their job classification throughout the year. The Committee authorizes a broader issuance of options to current employees generally every two years. This broader issuance occurred in the second quarter of 2004.

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Derivative Instruments

The Company has established policies and procedures to permit limited types and amounts of derivative instruments to help manage its interest rate risk. At various times under this authority, the Company has entered into interest rate swaps to mitigate interest rate risk. Under the terms of these swaps, the Company paid a fixed rate of interest to the counterparty and received a floating rate of interest. Such swaps have the effect of converting fixed rate financial instruments into variable or floating rate instruments. Such swaps may be related to specific instruments or specifically identified pools of instruments—loans, securities, or deposits with similar interest rate characteristics or terms.

The Company has also established policies and procedures to sell derivatives, specifically interest rate swaps, to customers to assist them in managing their interest rate risk. Generally these customers have wanted to protect themselves from rising rates. Depending on the notional amount of the swap, the Company may cover its position with an interest rate swap purchased from another counterparty with equal but opposite terms, thereby “covering” its position, so as not to incur any additional interest rate risk. With smaller transactions that mitigate the Company’s current interest rate risk position, the Company may elect not cover its position. The Company’s policy limits both the individual notional amount and the aggregate notional amount of these covered and uncovered derivatives.

The Company engages in a very small number of foreign exchange contracts with customers. These may be either spot or future contracts. Future contracts are always covered by an offsetting contract with another counterparty so that there is no risk of loss from changes in the relative price of currencies over the term of the contract.

Other types of derivatives are permitted by the Company’s policies, but have not been utilized.

All derivatives are required to be recorded at their current fair value on the balance sheet. Certain derivatives may be designated as either fair value or cash flow accounting hedges and qualify for the deferral of all or a part of changes in their fair value in the basis of the item being hedged or in accumulated other comprehensive income. Changes in the fair value of derivatives that are not related to specific instruments and do not meet the criteria for hedge accounting are included in net income, within other income or other expense as appropriate.

The swaps sold to customers are not intended to act as a hedge for the Company’s interest rate risk position with respect to the loan. They are intended only to be a hedge by the customer for the customer’s position. Consequently, they do not meet the requirement for hedge accounting. Consequently, changes in the fair value of these hedges are included in the Company’s net income in the period in which the changes occur. Because a derivative may not be used to hedge another derivative, any changes in the fair value of swaps entered into to cover the Company’s position on the customer swaps are also included in net income in the period in which they occur. Because the covering swap will have the same terms as the Company’s swap with the customer, gains and losses will net to no income impact for these swaps.

Variable Interest Entities

In December 2003, the FASB issued Interpretation No. 46R, Consolidation of Variable Interest Entities (“FIN 46R”). In effect, FIN 46R applies broader criteria than just voting rights in determining whether a controlling financial interest in one entity by another exists. Specifically, if by design the owners of the entity have not made an equity investment sufficient to absorb its expected losses and the owners lack any one of three essential characteristics of controlling financial interest, the entity is to be consolidated in the financial statements of its primary beneficiary. The three characteristics are the ability to make decisions about the entity’s activities, the obligation to absorb the expected losses of the entity, and the right to receive the expected residual returns of the entity.

The Company has two special-purpose entities used for the securitizations described in Note 8, “Transfers and Servicing of Financial Assets.” The special-purpose entity that was used for the indirect auto loan securitization was exempt from this pronouncement because it is a qualifying special-purpose entity (“QSPE”) as described in Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”) . If this entity were now active, instead of disclosing its rights and obligations related to this QSPE under the provisions of FIN 46, the Company would disclose them under the provisions of SFAS 140.

The special-purpose entity used for the tax refund loan securitization is a variable interest entity within the scope of FIN 46R, and is consolidated with the Company. In the structure of this securitization, the loans are sold by the special-purpose entity to securitization conduits established by one or more financial institutions to hold a variety of assets purchased from a number of other financial institutions. These conduits, which are different from the special purpose entity, are variable interest entities within the scope of FIN 46R. However, they

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hold refund anticipation loans (“RALs”) originated by the Company only during one month of each year. They continue to function during the eleven months of the year holding other types of loans purchased from other financial institutions. Therefore, because it is not the primary beneficiary of them and because it exercises no control over the other assets purchased or held, the Company has concluded that consolidation of these conduits with the Company is not required by FIN 46. While used only during the first quarter of each year, the special purpose entity for RALs remains in place from year to year.

In connection with the March 5, 2004 PCCI acquisition, Bancorp added three business trust subsidiaries which had been originally created by PCCI for the exclusive purpose of issuing trust preferred securities. The three subsidiaries are PCC Trust I, PCC Trust II, and PCC Trust III. The purchasers of the securities are the primary beneficiaries of these entities. Because Bancorp is not the primary beneficiary of these entities, in accordance with FIN 46 they are not consolidated with the Company. However, the Company has included the investments in these subsidiaries in “Other assets” and the subordinated debt owed by the Company to these subsidiaries is included in “Long-term debt and other borrowings” on its Consolidated Balance Sheets. This subordinated debt has exactly the same terms as the trust preferred securities owed by the trusts. In its Consolidated Statements of Income, the Company has reported dividend income from the subsidiaries in “Other income” and interest expense on the subordinated debt in “Other borrowed funds.”

The Company has invested in several partnerships that promote the development of low cost housing by providing incentives in the form of tax credits. The partnerships also help the Company to meet its obligations under the Community Reinvest-ment Act. These partnerships are variable interest entities within the scope of FIN 46 because, as a group, the holders of the equity interests in these entities do not have the direct or indirect ability to make decisions about the entities’ activities through voting rights or similar rights. The Company owns more than 50% of the partnership interests in one of these partnerships. The Company has therefore consolidated the assets, liabilities, and operating results of that partnership with the assets, liabilities and operating results of the Company. Consolidation resulted in an additional $3.1 million in assets and a liability for the minority interest of $3.1 million. The Company recognized the whole amount of the operating losses of this partnership which decreased noninterest revenue by $73,000 and recognized a reduction of other expense for $73,000 for the other partners’ share of the losses.

Management does not believe that the Company is the primary beneficiary of any other comparable entities such that consolidation with the Company’s financial statements would be required by GAAP.

New Accounting Pronouncements

Statement of Financial Accounting Standards No. 123R, Share-Based Payment (“SFAS 123R”) was issued in December 2004. It requires that the Company recognize in the income statement the fair value of stock options and other equity-based compensation issued to employees. The fair value is determined as of the date these equity instruments are granted. The compensation expense will be recognized as a charge against earnings over the requisite service period.

SFAS 123R permits two alternative transition methods; the modified prospective method and the modified retrospective transition method. Under the modified prospective method, awards that are granted, modified, or settled after the date of adoption should be measured and accounted for in accordance with SFAS 123R. Unvested equity-classified awards that were granted prior to the effective date should continue to be accounted for in accordance with SFAS 123 except that amounts must be recognized in the income statement. Under the modified retrospective approach, the previously reported amounts are restated, either to the beginning of the year of adoption or for all periods presented, to reflect the SFAS 123 amounts in the income statement.

The Statement was to be effective for interim periods beginning after June 15, 2005. In April 2005, the Securities Exchange Commission amended the effective date to be the start of the first fiscal year following June 15, 2005. Under this amendment, the Company will need to adopt SFAS 123R beginning with the first quarter of 2006. The Company has not, as yet, decided which of the two transition methods to use. Management expects the adoption of this statement will have an effect on its annual earnings approximately equivalent to the proforma adjustments disclosed above in this note for SFAS 123, i.e. a reduction of $1.2 million or $0.03 per share. Based on Management’s current expectations for net income for 2005, this would represent a reduction of approximately 1.10%.

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In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 03-3 (“SOP 03-3”). SOP 03-3 requires loans that are acquired in a transfer or business combination, the credit quality of which has deteriorated since origination, to be accounted for at fair value. No allowance for loan losses or other valuation allowance is permitted at the time of acquisition. Valuation allowances should reflect only losses incurred after the acquisition. Provisions of the SOP are required to be adopted for fiscal years beginning after December 15, 2004. The Company adopted SOP 03-3 on January 1, 2005 with no financial impact.

The Emerging Issues Task Force (“EITF”) was established by the FASB to provide prompt resolution of certain specialized accounting issues. In 2003, the EITF addressed the issue of how to measure and account for the other than temporary impairment of securities. The EITF reached a consensus that was described in a document entitled, Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“Issue 03-1”). Issue 03-1 defined impairment as the amount by which the cost of an investment (adjusted for the amortization of premium and the accretion of discount) exceeded the fair value of the investment.

Issue 03-1 requires that an investor write-down through a charge to income any other than temporary impairment of a security unless the investor has both the ability and intent to hold the maturity until recovery of the cost of the investment is assured. No distinction was made by the EITF between the treatment of other than temporary impairment due to credit concerns and that due to changes in interest rates. It also indicated that a pattern of sales of securities that were impaired because of interest rate reasons would taint the assertion by management that it had the intent to hold until recovery.

In September 2004, the FASB issued a pronouncement that it would re-examine the issue and that the provisions in the preceding paragraph would be held in abeyance until it could reach a conclusion.

The Company will consider how this practice will be impacted by the provisions of whatever pronouncement is issued by the FASB.

On February 28, 2005, the Company entered into a definitive agreement with First Bancshares, Inc. (“FSLO”) under which the Company will acquire FSLO in an all-cash transaction.

On March 5, 2004, the Company acquired Pacific Crest Capital, Inc. (“PCCI”) in an all cash transaction valued at $136 million, or $26 per each diluted share of Pacific Crest Capital common stock. PCCI was an Agoura Hills, California-based bank holding company that conducted business through its wholly-owned subsidiary, Pacific Crest Bank, which had three branches located in Beverly Hills, Encino and San Diego. Since its establishment in 1974, Pacific Crest Bank had operated as a specialized business bank serving small businesses, entrepreneurs and investors. Its products include customized loans on income producing real estate, business loans under the U.S. Small Business Administration (“SBA”) 7(a) and 504 programs, lines of credit and term loans to businesses and professionals, and savings and checking account programs. Pacific Crest Bank was an SBA-designated “Preferred Lender” in California, Arizona and Oregon. In addition to three branches, it operated six loan production offices in California and Oregon. The Company acquired PCCI primarily for its commercial real estate and SBA commercial business lending operations. The Company’s Consolidated Statement of Income for the three-month period ended March 31, 2004 includes the operations of PCCI from March 6, 2004 through March 31, 2004. The Company acquired $121 million in investment securities, $419 million in loans, $291 million in deposits, and other assets and liabilities in this transaction. The excess of the purchase price over the net fair value of the assets and liabilities, $80 million, was recognized as goodwill as discussed in Note 7, Goodwill and Other Intangible Assets.

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The following table presents pro forma combined information about results of operation as though the acquisition had occurred on January 1, 2004.

There were no extraordinary items or cumulative effects of accounting changes in the periods reported above for either company. The following nonrecurring items (pre-tax) are included in the Pacific Crest column in the above table for the period of January 1 through March 5, 2004 (in thousands):

There were no material nonrecurring items included in the Company operating results for the first three months of 2004 related to the acquisition other than the payment of the consideration.

Earnings per share for all periods presented in the Consolidated Statements of Income are computed based on the weighted average number of shares outstanding during each period. Diluted earnings per share include the effect of the potential issuance of common shares. For the Company, these include only shares issuable on the exercise of outstanding stock options. Stock options with an exercise price greater than the average market price during the period have been excluded from the computations below because they are anti-dilutive.

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The computation of basic and diluted earnings per share for the three-month periods ended March 31, 2005 and 2004, was as follows (share, option, and net income amounts in thousands):

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The amortized historical cost, market values and gross unrealized gains and losses of securities are as follows:

Gains or losses may be realized on securities in the available-for-sale portfolio if the Company sells any of these securities in response to changes in interest rates or for other reasons related to the management of the components of the balance sheet.

The fair value of securities can change due to credit concerns, i.e. whether the issuer will in fact be able to pay the obligation when due, and due to changes in interest rates. All of the securities held by the Company are classified as available for sale, and all are therefore carried at their fair value. However, as required by GAAP, adjustments to the carrying amount for changes in fair value for securities classified as available-for-sale are not recorded in the Company’s income statement. Instead, the after-tax effect of the change is shown in a separate component of capital. Consequently, as shown in the first table in this note, there are unrealized gains and losses related to the securities held by the Company. The amount of unrealized losses at March 31, 2005 has increased $10.5 million from December 31, 2004. All of this increase is due to changes in interest rates.

The Company does not hold any securities that it believes to be other than temporarily impaired where the impairment is due to credit concerns as described in Securities and Exchange Commission Staff Accounting Bulletin #59. Instead it is changes in interest rate that has caused the fair value to be less than the amortized cost. The Company has sometimes sold such securities because Management believes that such sales prevent a large build up of embedded losses that would reduce liquidity and income.

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The following table discloses securities balances by category that are at an unrealized loss at March 31, 2005 and December 31, 2004 and the range of duration of the loss. Included in the table are 104 securities that have been in an unrealized loss position for less than a year and 90 securities that have been in an unrealized loss position for more than one year. There are no credit concerns regarding any of these securities and consequently the Company has no reason to believe that the full par value of the securities will not be received. The Company has concluded that none of these securities is other than temporarily impaired.

The amortized historical cost and estimated market value of debt securities by contractual maturity are shown below. The issuers of certain of the securities have the right to call or prepay obligations before the contractual maturity date. Depending on the contractual terms of the security, the Company may receive a call or prepayment penalty in such instances.

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Loan Categories

The balances in the various loan categories are as follows: