SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2008

OR

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

For the transition period from              to             

COMMISSION FILE NUMBER NO: 0-11113

PACIFIC CAPITAL BANCORP

(Exact Name of Registrant as Specified in its Charter)

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

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

(805) 564-6405

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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

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

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

Number of shares of common stock of the registrant outstanding as of July 30, 2008: 46,194,529

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION			3
	Forward-looking statements		3
	Item 1.	Financial Statements:
		Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and as of December 31, 2007	4
		Consolidated Statements of Income (Unaudited)	5
		Consolidated Statements of Comprehensive Income (Unaudited)	6
		Consolidated Statements of Cash Flows (Unaudited)	7
		Notes to Condensed Consolidated Financial Statements (Unaudited)	8
The financial statements included in this Form 10-Q should be read with reference to Pacific Capital Bancorp’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
	Item 4.	Controls and Procedures	51
Glossary			53
PART II. OTHER INFORMATION			55
	Item 1.	Legal Proceedings	55
	Item 1A.	Risk Factors	55
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
	Item 3.	Defaults Upon Senior Securities	55
	Item 4.	Submission of Matters to a Vote of Security Holders	55
	Item 5.	Other Information	56
	Item 6.	Exhibits	56
SIGNATURES			56

2

PART I – FINANCIAL INFORMATION

Forward-Looking Statements

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

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

Purpose and Definition of Terms

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

Net interest margin is discussed throughout this document and presented on a fully tax equivalent basis (“FTE”).  This discussion should be read in conjunction with the Company’s 2007 Annual Report on Form 10-K (“2007 10-K”).  Terms and acronyms used throughout this document are defined in the glossary on pages 53 through 54.

3

Pacific Capital Bancorp and Subsidiaries

CONSOLIDATED BALANCE SHEETS

	June 30, 2008 (unaudited)		December 31, 2007
	(in thousands, except per share amounts)
Assets:
Cash and due from banks	$	149,343	$	141,086
Investment securities—trading, at fair value		62,324		146,862
Investment securities—available-for-sale (AFS) at fair value; amortized cost of $1,100,960 at June 30, 2008 and $1,147,824 at December 31, 2007		1,118,229		1,176,887
Loans:
Held for sale, at lower of cost or fair value		—		68,343
Held for investment, net of allowance for loan losses of $73,288 at June 30, 2008 and $44,843 at December 31, 2007		5,619,764		5,314,313
Total loans		5,619,764		5,382,656
Premises and equipment, net		79,636		86,921
Goodwill and other intangible assets		161,834		155,786
Other assets		294,193		284,148
Total assets	$	7,485,323	$	7,374,346
Liabilities:
Deposits:
Non-interest-bearing demand	$	991,570	$	1,002,281
Interest-bearing		3,647,629		3,961,531
Total deposits		4,639,199		4,963,812
Securities sold under agreements to repurchase		356,589		265,873
Federal funds purchased		68,150		6,800
Long-term debt and other borrowings		1,643,766		1,405,602
Other liabilities		67,949		63,903
Total liabilities		6,775,653		6,705,990
Commitments and contingencies (Note 12)
Shareholders’ equity:
Preferred stock — no par value; 1,000 shares authorized, no shares issued and outstanding.		—		—
Common stock — no par value; $0.25 per share stated value; 100,000 authorized; 46,195 shares issued and outstanding at June 30, 2008 and 46,127 at December 31, 2007		11,549		11,537
Surplus		106,646		103,953
Retained earnings		582,579		537,065
Accumulated other comprehensive income		8,896		15,801
Total shareholders’ equity		709,670		668,356
Total liabilities and shareholders’ equity	$	7,485,323	$	7,374,346

See the accompanying notes.

4

Pacific Capital Bancorp and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

	Three-Months Ended June 30,						Six-Months Ended June 30,
	2008			2007			2008		2007
	(in thousands, except per share amounts)
Interest income:
Loans	$	89,163		$	108,545		$	283,252	$	331,465
Investment securities—trading		803			—			1,636		—
Investment securities—available-for-sale		13,259			11,550			27,345		24,538
Other		150			297			2,161		1,101
Total interest income		103,375			120,392			314,394		357,104
Interest expense:
Deposits		18,388			31,416			46,811		66,840
Securities sold under agreements to repurchase		2,653			2,478			5,426		5,101
Federal funds purchased		149			1,794			989		6,015
Long-term debt and other borrowings		17,817			17,869			35,614		36,919
Total interest expense		39,007			53,557			88,840		114,875
Net interest income		64,368			66,835			225,554		242,229
Provision for loan losses		37,167			5,115			85,561		84,093
Net interest income after provision for loan losses		27,201			61,720			139,993		158,136
Non-interest income:
Service charges and fees		9,067			10,427			19,191		23,108
Refund transfer fees		8,636			6,168			68,191		45,386
Trust and investment advisory fees		6,655			5,944			13,286		12,174
(Loss)/Gain on securities, net		(2,773	)		(2	)		66		1,939
Gain on sale of RALs, net		—			—			44,580		41,822
Gain on sale of leasing portfolio		—			24,344			—		24,344
Other		616			1,978			2,203		4,340
Total non-interest income		22,201			48,859			147,517		153,113
Non-interest expenses:
Salaries and employee benefits		31,314			31,081			66,006		66,881
Occupancy expenses, net		6,506			5,579			13,014		10,888
Furniture, fixtures and equipment, net		1,975			2,610			4,580		5,076
Refund program marketing and technology fees		1,257			13			46,257		44,500
Other		23,632			17,776			56,684		44,608
Total non-interest expenses		64,684			57,059			186,541		171,953
Income before provision for income taxes		(15,282	)		53,520			100,969		139,296
Provision for income taxes		(9,389	)		20,354			34,379		54,492
Net income	$	(5,893	)	$	33,166		$	66,590	$	84,804
Income per share—basic	$	(0.13	)	$	0.71		$	1.44	$	1.80
Income per share—diluted	$	(0.13	)	$	0.70		$	1.43	$	1.79
Average number of shares—basic		46,172			47,016			46,155		46,984
Average number of shares—diluted		46,518			47,286			46,490		47,304
Dividends per share	$	0.22		$	0.22		$	0.44	$	0.44

See the accompanying notes.

5

Pacific Capital Bancorp and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

	Three-Months Ended June 30,						Six-Months Ended June 30,
	2008			2007			2008			2007
	(in thousands)
Net income	$	(5,893	)	$	33,166		$	66,590		$	84,804
Other comprehensive income, net:
Unrealized loss on securities AFS, net		(10,281	)		(6,728	)		(8,775	)		(5,047	)
Impairment loss on securities, net		1,479			—			1,943			—
Realized loss (gain) on sale of securities AFS included in income, net		8			—			(3	)		(1,125	)
Postretirement benefit obligation arising during period, net		(35	)		46			(70	)		46
Net other comprehensive income		(8,829	)		(6,682	)		(6,905	)		(6,126	)
Comprehensive income	$	(14,722	)	$	26,484		$	59,685		$	78,678

The amounts reclassified out of accumulated other comprehensive income into earnings for the three and six month periods ended June 30, 2008, were $2.6 million and $3.3 million, respectively. The income tax benefit related to these amounts were $1.1 million and $1.4 million for the three and six month periods ended June 30, 2008, respectively. The amount reclassified out of accumulated other comprehensive income into earnings for the six month period ended June 30, 2007 was $1.9 million. The income tax expense related to this amount was $816,000 for the six-month period ended June 30, 2007.

See the accompanying notes.

6

Pacific Capital Bancorp and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Six-Months Ended June 30,
	2008			2007
	(in thousands)
Cash flows from operating activities:
Net income	$	66,590		$	84,804
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		85,561			84,093
Depreciation and amortization		12,812			10,599
Stock-based compensation		2,559			3,055
Excess tax benefit of stock-based compensation		(42	)		(595	)
Net amortization of discounts and premiums for investment securities		(5,048	)		(5,206	)
(Gains)/losses on:
Sale of loans, net		(44,726	)		(65,519	)
Securities, AFS		3,349			(1,939	)
Changes in:
Other assets		(12,158	)		(24,933	)
Other liabilities		3,401			32,348
Trading securities, net		84,538			(1,011	)
Servicing rights, net		(329	)		12
Net cash provided by operating activities		196,507			115,708
Cash flows from investing activities:
Proceeds from loan sales		2,096,725			2,125,798
Proceeds from sales, calls and maturities of AFS securities		—			314,772
Principal pay downs and maturities of AFS securities		270,750			110,339
Purchase of AFS securities		(222,187	)		(225,161	)
Loan originations and principal collections, net		(2,374,668	)		(1,923,463	)
Purchase of Federal Home Loan Bank stock		(76	)		(2,725	)
Purchase of premises and equipment, net		(4,402	)		(4,663	)
Proceeds from sale of other real estate owned		420			—
Net cash (used in) provided by investing activities		(233,438	)		394,897
Cash flows from financing activities:
Net decrease in deposits		(324,613	)		(262,424	)
Net increase (decrease) in short-term borrowings		256,276			(22,518	)
Proceeds from long-term debt and other borrowings		210,000			110,000
Repayments of long-term debt and other borrowings		(76,163	)		(127,914	)
Excess tax benefit of stock-based compensation		42			595
Proceeds from exercise of stock options		194			3,125
Cash dividends paid on common stock		(20,500	)		(20,861	)
Other, net		(48	)		515
Net cash provided by (used in) by financing activities		45,188			(319,482	)
Net increase in cash and due from banks		8,257			191,123
Cash and cash equivalents at beginning of period		141,086			154,182
Cash and cash equivalents at end of period	$	149,343		$	345,305
Supplemental disclosure:
Cash paid during the period for:
Interest	$	88,944		$	116,569
Income Taxes		45,731			32,620
Non-cash investing activity:
Transfers to other real estate owned		822			57
Transfers from loans held for sale to trading securities		68,343			—

See the accompanying notes.

7

Pacific Capital Bancorp and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Nature of Operations

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

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

Basis of Presentation

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

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

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

Consolidation of Subsidiaries

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

PCBNA has four wholly-owned consolidated subsidiaries:

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

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

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

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

8

Segments

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

SIGNIFICANT ACCOUNTING POLICIES

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

New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No.  157, “Fair Value Measurements” (“SFAS 157”).  SFAS 157 addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP.  SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  The Company adopted SFAS 157 on January 1, 2008.  There was no financial impact to the Consolidated Financial Statements upon adoption.  For additional information on the fair value of certain financial assets and liabilities, see Note 13, “Fair Value of Financial Instruments” of these Consolidated Financial Statements on page 24.

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

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

2.  MERGERS AND ACQUISITIONS

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

9

3.  EARNINGS PER SHARE

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

	Three-Months Ended June 30,					Six-Months Ended June 30,
	2008			2007		2008		2007
	(in thousands, except per share amounts)
Basic weighted average shares outstanding		46,171			47,016		46,155		46,984
Dilutive effect of stock options		347			270		335		320
Diluted weighted average shares outstanding		46,518			47,286		46,490		47,304
Diluted Earnings Per Share	$	(0.13	)	$	0.70	$	1.43	$	1.79

For the three months and six months ended June 30, 2008, the average outstanding unexercised stock options of 1,295,000 and 1,225,000 shares, respectively, were not included in the computation of earnings per share because they were antidilutive.  For the three months and six months ended June 30, 2007, the average outstanding unexercised stock options of 992,000 and 348,000 shares, respectively, were not included in the computation of earnings per share because they were antidilutive.

4.  SECURITIES

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

	June 30, 2008
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
Trading Securities:
Mortgage-backed securities (3)	$	62,324	$	—	$	—		$	62,324
Total		62,324		—		—			62,324
Available-for-Sale:
U.S. Treasury obligations (1)		30,217		228		—			30,445
U.S. Agency obligations (2)		439,531		2,102		(736	)		440,897
Collateralized mortgage obligations		22,266		101		(557	)		21,810
Mortgage-backed securities (3)		348,258		1,973		—			350,231
Asset-backed securities		2,042		—		(281	)		1,761
State and municipal securities		258,646		16,653		(2,214	)		273,085
Total		1,100,960		21,057		(3,788	)		1,118,229
Total Securities	$	1,163,284	$	21,057	$	(3,788	)	$	1,180,553

10

	December 31, 2007
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
Trading Securities:
Mortgage-backed securities (3)	$	146,862	$	—	$	—		$	146,862
Total		146,862		—		—			146,862
Available-for-Sale
U.S. Treasury obligations (1)		39,803		194		—			39,997
U.S. Agency obligations (2)		477,281		2,284		(75	)		479,490
Collateralized mortgage obligations		23,838		120		(97	)		23,861
Mortgage-backed securities (3)		382,003		940		—			382,943
Asset-backed securities		2,194		4		—			2,198
State and municipal securities		222,705		26,300		(607	)		248,398
Total		1,147,824		29,842		(779	)		1,176,887
Total Securities	$	1,294,686	$	29,842	$	(779	)	$	1,323,749

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

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

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

Trading Securities

At June 30, 2008, the Company held $62.3 million of trading securities, a decrease of $84.5 million since December 31, 2007.  In January 2008, the fixed rate trading securities of $146.9 million held at December 31, 2007 were sold and a gain on sale of $2.3 million was recognized during the first quarter of 2008.  On January 4, 2008, the Company transferred $67.6 million of residential real estate loans to securities which are currently held in the trading portfolio.  For the three and six months ended June 30, 2008, the market value of the securities held in the trading portfolio decreased by $206,000 and increased by $1.1 million, respectively.  The valuation change was recorded in non-interest income.

Available for Sale Securities (“AFS”)

At June 30, 2008, the Company held $1.12 billion of AFS, a decrease of $58.7 million since December 31, 2007.  A majority of this decrease was due to maturities and calls of U.S. Agency securities, combined with principal pay downs of Mortgage Backed Securities (“MBS”), and mark to market adjustments offset by purchases of U.S Agencies and tax exempt securities.

As disclosed in Note 4, “Securities” of the Consolidated Financial Statements in the 2007 10-K, in the fourth quarter of 2007, Management changed its intent with regard to holding its AFS MBS until maturity or ultimate recovery.  As a result, the Company recognized $2.6 million and $3.4 million of additional impairment loss for the three and six month periods ended June 30, 2008, respectively, after recognizing a $3.0 million impairment loss at December 31, 2007.  Management has not changed its intent with respect to the remainder of the securities held in the AFS portfolio and has the ability to hold them.

11

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

	June 30, 2008
	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(in thousands)
US Treasury/US Agencies	$	127,898	$	(736	)	$	—	$	—		$	127,898	$	(736	)
Municipal Bonds		62,009		(1,828	)		4,445		(386	)		66,454		(2,214	)
Collateralized mortgage obligations		11,567		(298	)		3,809		(259	)		15,376		(557	)
Asset backed Securities		1,761		(281	)		—		—			1,761		(281	)
Total	$	203,235	$	(3,143	)	$	8,254	$	(645	)	$	211,489	$	(3,788	)

	December 31, 2007
	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(in thousands)
US Treasury/US Agencies	$	24,999	$	(1	)	$	64,044	$	(74	)	$	89,043	$	(75	)
Municipal Bonds		12,361		(361	)		12,877		(246	)		25,238		(607	)
Collateralized mortgage obligations		—		—			4,131		(97	)		4,131		(97	)
Total	$	37,360	$	(362	)	$	81,052	$	(417	)	$	118,412	$	(779	)

The $3.8 million and $779,000 of unrealized losses for the AFS portfolio as of June 30, 2008 and December 31, 2007, respectively, are a result of market interest rate fluctuations.  The issuers of these securities have not, to the Company’s knowledge, established any cause for default on these securities and the most recent ratings on all securities are all long-term investment grade.  Management is aware of one Collateralized Mortgage Obligation (“CMO”) security with a fair value of $1.8 million held in the AFS portfolio that has some sub-prime loans as the underlying collateral.  The CMO currently has an investment rating of AAA and is fully collateralized.  The Company has the ability and the intent to hold these securities until ultimate recovery or maturity.  As such, Management does not believe that there are any securities that are other-than-temporarily impaired as of June 30, 2008 other than the MBS portfolio as discussed above.

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

All investment securities are reported in the “All Other” segment for the segment reporting in Note 14, “Segments” of these Consolidated Financial Statements.

Interest Income

Interest income for trading and AFS securities on a FTE basis was $15.6 million and $13.0 million for the three month periods ended June 30, 2008 and 2007, respectively.  The taxable and non-taxable interest income for the comparable three month periods of June 30, 2008 and 2007 were: taxable interest income of $10.9 million and $8.8 million for the comparable periods and, non-taxable interest income of $4.7 million and $4.3 million.

Interest income for trading and AFS securities on a FTE basis was $31.5 million and $27.4 million for the six month periods ended June 30, 2008 and 2007, respectively.  The taxable and non-taxable interest income for the comparable three month periods of June 30, 2008 and 2007 were: taxable interest income of $22.9 million and $19.0 million for the comparable periods and, non-taxable interest income of $8.6 million and $8.5 million.

12

5.  LOANS

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

	June 30, 2008		December 31, 2007
	(in thousands)
Real estate:
Residential—1 to 4 family	$	1,175,267	$	1,075,663
Multi-family residential		279,922		278,935
Commercial		1,713,846		1,558,761
Construction		677,678		651,307
Commercial loans		1,233,030		1,196,808
Home equity loans		413,832		394,331
Consumer loans		196,066		200,094
RALs		1,000		—
Other loans		2,411		3,257
Total loans		5,693,052		5,359,156
Allowance for loan losses		73,288		44,843
Net loans	$	5,619,764	$	5,314,313

Total loans are net of deferred loan origination, commitment and extension fees and origination costs of $5.6 million as of June 30, 2008 and $6.9 million as of December 31, 2007.  At December 31, 2007, the Company held $68.3 million of residential real estate loans as held for sale which were transferred to securities in January 2008.

Impaired Loans

The following table reflects recorded investment in impaired loans:

	June 30, 2008			December 31, 2007
	(in thousands)
Impaired loans with specific valuation allowance	$	30,205		$	51,998
Valuation allowance related to impaired loans		(3,927	)		(3,944	)
Impaired loans without specific valuation allowance		106,615			6,171
Impaired loans, net	$	132,893		$	54,225

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

13

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

	Three-Months Ended June 30,				Six-Months Ended June 30,
	2008		2007		2008		2007
	(in thousands)
Average investment in impaired loans for the period	$	138,085	$	8,748	$	115,432	$	11,750
Interest recognized during the period for impaired loans	$	2,576	$	342	$	4,902	$	524

The increase in the average balance for impaired loans during the three and six month periods ended June 30, 2008 compared to the same periods in 2007 is primarily due to the deterioration of six sizable customer relationships, five in residential loan construction (home building activities) and one commercial loan (auto parts).

Refund Anticipation Loans

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

Pledged Loans

At June 30, 2008 and December 31, 2007, loans secured by first trust deeds on residential and commercial property with principal balances totaling $1.04 billion and $977.4 million, respectively, were pledged as collateral to the Federal Reserve Bank of San Francisco (“FRB”); and $2.73 billion and $3.10 billion, respectively, were pledged to the Federal Home Loan Bank (“FHLB”).  The amount of loans pledged does not represent the amount of outstanding borrowings at the FRB or the FHLB.  The Company pledges loans as collateral for the Company’s borrowings in accordance with the Company’s agreements with the FRB and the FHLB.

Letters and Lines of Credit

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

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

	June 30, 2008
	Total		Less than one year		One to three years		Three to five years		More than five years
	(in thousands)
Commercial lines of credit	$	653,454	$	408,287	$	80,296	$	78,309	$	86,562
Consumer lines of credit		355,504		3,320		11,838		36,672		303,674
Standby letters of credit and financial guarantees		136,942		72,102		20,491		18,530		25,819
Total	$	1,145,900	$	483,709	$	112,625	$	133,511	$	416,055

The Company has recorded a $285,000 liability associated with the unearned portion of the letter of credit fees for these guarantees as of June 30, 2008 compared to $382,000 at December 31, 2007.

The Company has exposure to loan losses from unfunded loan commitments and letters of credit.  As funds have not been disbursed on these commitments, they are not reported as loans outstanding.  Loan losses related to these commitments are not included in the allowance for loan losses reported in Note 7, “Allowance for Loan Losses” of this Form 10-Q and are accounted for as a separate loss contingency as a liability.  This loss contingency for the unfunded

14

loan commitments and letters of credit was $4.4 million at June 30, 2008, an increase of $3.3 million since December 2007.  Changes to this liability are adjusted through other non-interest expense.

The table below summarizes the activity for this loss contingency:

	Three-Months Ended June 30,					Six-Months Ended June 30,
	2008		2007			2008		2007
	(in thousands)
Beginning balance	$	3,663	$	1,551		$	1,107	$	1,448
Additions, net		714		(382	)		3,270		(279	)
Balance	$	4,377	$	1,169		$	4,377	$	1,169

6.  LOAN SALES AND TRANSACTIONS

RALs

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

Residential Real Estate Loans

On January 4, 2008, the Company converted $68.2 million of adjustable rate residential real estate loans from the Community Banking segment to MBS held in the Company’s trading portfolio with a discounted par amount of $67.6 million.  The Company retained the servicing on the loans sold at a rate of 25 basis points and recognized a servicing asset of $402,000.  Any resulting gain or loss for this transaction will be realized by the Company when the securities received in the conversion are sold.

15

7.  ALLOWANCE FOR LOAN LOSSES

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

	Three-Months Ended June 30,						Six-Months Ended June 30,
	2008			2007			2008			2007
	(in thousands)
Balance, beginning of period	$	65,491		$	63,204		$	44,843		$	64,671
Loans charged-off:
RALs		(6,215	)		(5,928	)		(53,752	)		(91,340	)
Core Bank Loans		(29,060	)		(6,414	)		(33,851	)		(21,250	)
Total Loans charged-off		(35,275	)		(12,342	)		(87,603	)		(112,590	)
Recoveries on loans previously charged-off:
RALs		5,378			594			27,338			21,754
Core Bank Loans		527			2,304			3,149			5,283
Total recoveries on loans previously charged-off		5,905			2,898			30,487			27,037
Net charge-offs		(29,370	)		(9,444	)		(57,116	)		(85,553	)
Provision for loan losses:
RALs		(6,378	)		(281	)		26,414			71,577
Core Bank Loans		43,545			5,396			59,147			12,516
Total provision for loan losses		37,167			5,115			85,561			84,093
Adjustments from loan sales		—			(15,326	)		—			(19,662	)
Balance, end of period	$	73,288		$	43,549		$	73,288		$	43,549

The allowance for loan losses increased by $29.7 million due to the need to add additional allowance for inherent loan losses in the Core Bank loan portfolio.  The discussion surrounding the causes for this increase are discussed in more detail within the Management Discussion & Analysis (“MD&A”), Provision for Loan Losses and Allowance for Loan Losses section which start on page 39 and 44, respectively of this Form 10-Q.

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

8.  RAL AND RT PROGRAMS

RAL and RT Programs

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

Refund Anticipation Loans

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

The RAL funds advanced by the Bank are generally repaid by the IRS within several weeks.  Therefore, the processing costs and provision for loan loss represent the major costs of these loans.  This cost structure is different than for other

16

loans since usually the cost of funds is the major cost for the Company in making a loan.  Because of their short duration, the Bank cannot recover the processing costs through interest collected over the term of the loan.  Consequently, the Bank has structured the fees to have a fixed component to cover processing costs and a variable component to cover loan losses and the cost of funds.  The customer signs a promissory note which requires the Company to report fees received for RALs as interest income.

Net interest income for RALs was $2.9 million and $2.7 million for the three month periods ended June 30, 2008 and, June 30, 2007, respectively.  As discussed above, approximately 90% of the activity occurs in the first quarter each year and net interest income for the six month periods ending June 30, 2008 and 2007 was $104.1 million and $107.3 million, respectively.  Included in net interest income for RALs is interest income from short-term investments of $1.7 million for the six month period ended June 30, 2008 and, interest expense for the funding of the RAL program of $685,000 and $1.5 million for the three month periods ending June 30, 2008 and 2007, respectively and, $6.3 million and $11.1 million for the six month periods ending June 30, 2008 and 2007, respectively.

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

	Six-Months Ended June 30,
	2008			2007
	(in thousands)
Originations:
RAL loans retained	$	4,572,061		$	4,150,370
RAL loans securitized		2,205,130			1,694,489
Total RAL loans	$	6,777,191		$	5,844,859
Loan losses:
Charge-offs of retained RALs, net	$	(26,414	)	$	(69,586	)
Charge-offs of securitized RALs, net		(14,914	)		(14,189	)
Total RAL program losses, net	$	(41,328	)	$	(83,775	)

In 2007 and prior, any RAL balance for which repayment had not been received by the end of the year was charged off.  Therefore, no RALs are reported as of December 31 each year.  At June 30, 2008, the outstanding RAL balance was $1.0 million.

Fees Earned on RALs and RTs

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

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

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

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

17

The following table presents RAL and RT fees:

	Three-Months Ended June 30,						Six-Months Ended June 30,
	2008			2007			2008			2007
	(dollars in thousands)
RAL Fees:
Total RAL Fees	$	3,611		$	4,188		$	108,762		$	118,456
% of Total Fees		29	%		40	%		61	%		72	%
RT Fees:
Total RT Fees	$	8,636		$	6,168		$	68,191		$	45,386
% of Total Fees		71	%		60	%		39	%		28	%
Total Fees	$	12,247		$	10,356		$	176,953		$	163,842

The volume of RTs increased by 1.5 million transactions or 31.1% when comparing the activity through June 30^th of 2008 to 2007 with 6.3 million of transactions for the 2008 RAL season compared to 4.8 million transactions for the 2007 season.  Implementation of these risk management controls resulted in an increased number of RAL customer applications that were declined which then converted to an RT, causing the $22.8 million increase in RT fees for the six month period ending June 30, 2008 compared to June 30, 2007.

Refund Anticipation Loan Securitizations

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

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

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

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

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

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

18

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

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

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

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

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

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

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

(3) Cash paid to the investors for the commitment and funding fees;

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

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

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

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

	Six-Months Ended June 30,
	2008			2007
	(in thousands)
RAL fees received on securitized loans	$	64,123		$	59,969
Fees paid to investor		(2,176	)		(2,118	)
Commitment fees paid		(2,320	)		(1,575	)
Other fees paid		(133	)		(265	)
Loan losses		(14,914	)		(14,189	)
Net gain on sale of RALs	$	44,580		$	41,822

19

RAL Allowance and Provision for loan losses

The Company follows the same policies for charging-off RALs regardless of whether the RAL had been securitized or not.  All outstanding RALs were charged-off at June 30, 2008 for the current RAL season except for $1.0 million of RALs which were subsequently collected or reasonably expected to be collected after June 30, 2008.

RAL provision for loan losses was negative $6.4 million and $281,000 for the three months ended June 30, 2008 and 2007, respectively and for the six months ended June 30, 2008 and 2007 RAL provision for losses was $26.4 million and $71.6 million, respectively.  The decreased provision for loan losses on RALs for the comparable periods is due to the enhanced credit risk controls implemented by the Bank.  Additionally, starting in 2008, the Company is no longer offering the RAL pre-file loan product due to high loss rates experienced in the past.  The Company’s decision to eliminate the pre-file product in 2008 and the credit risk controls both contributed to a lower loan loss rate of 1.01% at June 30, 2008 compared to a loan loss rate of 2.08% at June 2007.

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

Refund Transfer Fees

Fees earned on RTs are recognized in non-interest income as a separate line item, “Refund transfer fees”.  RT fees earned for the three month periods ended June 30, 2008 and 2007 were $8.6 million and $6.2 million, respectively.  RT fees earned for the six month periods ended June 30, 2008 and 2007 were $68.2 million and $45.4 million, respectively.  The increase in RT fees was the result of increased volumes for the comparable quarters.

9. LONG-TERM DEBT AND OTHER BORROWINGS

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

	June 30, 2008		December 31, 2007
	(in thousands)
Other short-term borrowings:
Amounts due to the Federal Reserve Bank	$	210,457	$	106,247
Total short-term borrowings		210,457		106,247
Long-term debt:
Federal Home Loan Bank advances		1,233,047		1,099,126
Subordinated debt issued by the Bank		121,000		121,000
Subordinated debt issued by the Company		69,453		69,537
Total long-term debt		1,423,500		1,289,663
Total long-term debt and other short-term borrowings		1,633,957		1,395,910
Obligation under capital lease		9,809		9,692
Total long-term debt and other borrowings	$	1,643,766	$	1,405,602

Other Short-Term Borrowings

Other short-term borrowings include treasury tax and loans (“TT&Ls”) with the FRB and short term advances with the FRB.  TT&Ls are obtained through the FRB’s Term Investment Option (“TIO”) program.  The TIO is an investment opportunity offered to participants that have treasury tax and loans with the FRB.  Included within the TT&L amounts are payroll deposits made by employers to PCBNA for eventual payment to the IRS.  PCBNA may hold these deposits and pay interest on them until called by the Treasury Department.  For the three months ended June 30, 2008 and 2007, interest expense on short-term borrowings was $353,000 and $1.9 million, respectively with a weighted average rate of 2.15% and 5.22%, respectively.  For the six months ended June 30, 2008 and 2007, interest expense on short-term borrowings was $1.4 million and $5.2 million, respectively with a weighted average rate of 2.11% and 5.21%, respectively.

20

10. POSTRETIREMENT BENEFITS

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

The following table summarizes the expense recognized for postretirement benefits:

	Three-Months Ended June 30,						Six-Months Ended June 30,
	2008			2007			2008			2007
	(in thousands)
Service cost	$	294		$	346		$	588		$	693
Interest cost		299			280			598			560
Return on plan assets		(226	)		(191	)		(453	)		(383	)
Gain		126			172			253			344
Prior service cost		(161	)		(161	)		(323	)		(323	)
Total	$	332		$	446		$	663		$	891

At the end of each year, the Company contracts a third party to estimate the amount of the Company’s required liability for postretirement benefits and to forecast the postretirement benefit expense for the following year.  As of June 30, 2008 and December 31, 2007, the Company has recorded a liability for postretirement benefits of $4.8 million and $5.6 million, respectively.

Split-Dollar Life Insurance Arrangements

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (“EITF 06-4”).  EITF 06-4 requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement.  The required accrued liability is based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement.  The Company adopted EITF 06-4 on January 1, 2008, and recorded a cumulative effect adjustment of $576,000 as a reduction of retained earnings effective January 1, 2008.  On a monthly basis, the Company records the benefit expense of such insurance coverage.  Benefit expense during the three and six month periods ended June 30, 2008 were $6,000 and $12,000, respectively.

11. OTHER INCOME AND EXPENSE

Other Income

Within the line item of other income are losses from low-income housing partnerships which generate tax credits.  The losses from these partnerships were $2.6 million and $721,000 for the second quarter of 2008 and 2007, respectively and $3.2 million and $1.3 million for the six month periods ending June 30, 2008 and 2007, respectively.

21

Other Expense

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

	Three-Months Ended June 30,					Six-Months Ended June 30,
	2008		2007			2008		2007
	(in thousands)
Other Expense:
Software	$	6,207	$	3,799		$	9,615	$	8,009
Developers performance fees		2,694		276			11,749		4,389
Consultants		1,578		3,000			4,051		5,738
Telephone		1,180		1,320			3,273		3,390
Accounting and audit		1,045		660			1,819		1,420
Reserve for off balance sheet commitments		714		(382	)		3,270		(279	)
Other		10,214		9,103			22,907		21,941
Total	$	23,632	$	17,776		$	56,684	$	44,608

The increase in software expense of $2.4 million and $1.6 million for the three and six month periods ending June 30, 2008 and 2007, respectively was incurred due to depreciation expense associated with capitalized software which had not been depreciating since January 2007.  The cumulative correction of this error was made as an addition to depreciation expense in June 2008.  Management concluded that the amount of the error and the correction was not material to the Company’s financial statements for any period presented in 2007 or 2008.  All other significant changes are discussed in the MD&A, non-interest expense section beginning on page 42.

12. COMMITMENTS AND CONTINGENCIES

Leasing of Premises

The Company leases the majority of its locations.  Substantially all of these leases contain multiple renewal options and provisions for increases to lease payments.  As of June 30, 2008, the minimum obligations under non-cancelable leases for the next five years and thereafter are shown in the table below.  These amounts are not adjusted for the contractual obligations of sub-tenants due to the Company.  Sub-tenants’ lease obligations to the Company were approximately $1.5 million at June 30, 2008.  Approximately 57% of these payments are due to the Company over the next three years.

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

	June 30, 2008										December 31, 2007
	Less than one year		One to three years		Three to five years		More than five years		Total
	(in thousands)
Non-cancelable leases	$	10,773	$	17,706	$	12,430	$	18,581	$	59,490	$	48,612
Capital leases		398		906		906		23,583		25,793		25,965
Total	$	11,171	$	18,612	$	13,336	$	42,164	$	85,283	$	74,577

22

Legal Matters

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

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

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

A Sixth Amended Complaint has been filed which adds an additional plaintiff, Tyree Bowman.  A class certification hearing is scheduled for November 12, 2008.  The Company continues to believe that there is no merit to the claims made in this action and intends to vigorously defend itself.

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

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

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

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

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

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

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

4. For rescission of the 2008 Bank Product Agreement.

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

In Big Sky Ventures, the Company filed a motion to dismiss the complaint.  Following a hearing on May 15, 2008, the motion was granted in part and denied in part.  The judge’s order granted the motion to dismiss as to the cause of action

23

for rescission and denied it as to the other causes of action.  In addition, the order struck the plaintiffs requests for punitive damages and attorneys fees.  The plaintiffs have filed an amended complaint.

In the Irlanda case, an amended complaint has been filed.  No hearings have been scheduled.

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

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

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

Level 1:	Observable quoted prices in active markets for identical assets and liabilities.
Level 2:	Observable quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3:	Model-based techniques that use at least one significant assumption not observable in the market.  These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

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

Securities

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

Loans Held for Sale

Loans held for sale are carried at the lower of cost or market.  The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics.  As such, the Company classifies loans subjected to non-recurring fair value adjustments as level 2.  As of June 30, 2008, the Company did not have any loans classified as held for sale.

Impaired Loans

The Company records loans at fair value on a non-recurring basis when a loan is considered impaired and an allowance for loan losses is established.  SFAS 157 applies to loans measured for impairment using the practical expedients permitted by SFAS 114, Accounting by Creditors for Impairment of a Loan, including impaired loans measured at an observable market price or at the fair value of the loans collateral, if the loan is collateral dependent.  The fair value of the loan’s collateral is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral.  When the fair value of the loan’s collateral is based on an observable market price or current appraised value, the Company classifies the impaired loans as a non-recurring level 2 of the valuation hierarchy.   When

24

the Company measures impairment using anything but an observable market price or a current appraised value, the fair value measurement is out of the scope of SFAS 157 and is not included in the tables below.

Servicing Rights

Servicing rights are carried at the lower of cost or fair value.  Servicing rights are subject to quarterly impairment testing.  When servicing rights fair value is lower than the cost, an impairment is accounted for by reducing the asset to the current fair value.  The Company uses independent third parties to value the servicing rights.  The valuation model used takes into consideration discounted cash flows using current interest rates, and prepayment speeds based on current market observations for each type of the underlying asset being serviced.  The Company classifies these servicing rights as non-recurring level 3 in the valuation hierarchy.  For the three months ended June 30, 2008, no impairment was recorded for the servicing rights held by the Company.  For the six months ended June 30, 2008, the Company reduced the carrying value of the servicing rights by $758,000 due to amortization and declines in the fair value.

Goodwill

Goodwill is tested for impairment on an annual basis during the third quarter.  A projected cash flow valuation method is used in the completion of impairment testing performed by an independent third party.  In the event that the projected undiscounted cash flows are less than the carrying value, the asset is recorded at fair value as determined by the valuation model.  As such, the Company used level 3 fair value adjustments for the non-recurring valuation of Goodwill.  As of June 30, 2008, the Company’s Goodwill was not deemed to be impaired.

Other Intangible Assets

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

Fair Value Interest Rate Swaps

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

25

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

			Recurring Fair Value Measurements at Reporting
	As of June 30, 2008		Quoted prices in active markets for identical assets (Level 1)		Active markets for similar assets (Level 2)		Unobservable inputs (Level 3)
	(in thousands)
Assets:
Trading Securities:
Mortgage-backed securities	$	62,324	$	—	$	62,324	$	—
Total		62,324		—		62,324		—
Available-for-Sale:
U.S. Treasury obligations		30,445		—		30,445		—
U.S. Agency obligations		440,897		—		440,897		—
Collateralized mortgage obligations		21,810		—		21,810		—
Mortgage-backed securities		350,231		—		350,231		—
Asset-backed securities		1,761		—		1,761		—
State and municipal securities		273,085		—		273,085		—
Total		1,118,229		—		1,118,229		—
Fair value swap asset		6,147		—		6,147		—
Total assets at fair value	$	1,186,700	$	—	$	1,186,700	$	—
Liabilities:
Fair value swap liability	$	6,147	$	—	$	6,147	$	—
Total liabilities at fair value	$	6,147	$	—	$	6,147	$	—

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

26

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

			Non-recurring Fair Value Measurements at Reporting
	As of June 30, 2008		Quoted prices in active markets for identical assets (Level 1)		Active markets for similar assets (Level 2)		Unobservable inputs (Level 3)
	(in thousands)
Assets:
Impaired Loans	$	3,939	$	—	$	3,939	$	—
Impaired off balance sheet commitments		627				627
Servicing Rights		3,965		—		—		3,965
Intangible assets		7,515		—		—		7,515
Total assets at fair value	$	16,046	$	—	$	4,566	$	11,480

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

14. SEGMENTS

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

27

Segment Disclosure

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

	Three-Months Ended June 30, 2008
	Operating Segments
	Community Banking			Commercial Banking		RAL and RT Programs			Wealth Management			All Other			Total
	(in thousands)
Interest income	$	29,645		$	53,565	$	3,611		$	2,336		$	14,218		$	103,375
Interest expense		9,944			—		685			6,248			22,130			39,007
Net interest income		19,701			53,565		2,926			(3,912	)		(7,912	)		64,368
Provision for loan losses		16,467			25,749		(6,378	)		1,329			—			37,167
Non-interest income		5,734			1,860		9,061			7,985			(2,439	)		22,201
Non-interest expense		10,898			4,424		8,403			7,342			33,617			64,684
Income (loss) before tax	$	(1,930	)	$	25,252	$	9,962		$	(4,598	)	$	(43,968	)	$	(15,282	)
Total assets	$	1,956,847		$	3,613,955	$	1,000		$	193,284		$	1,720,237		$	7,485,323

	Three-Months Ended June 30, 2007
	Operating Segments
	Community Banking		Commercial Banking		RAL and RT Programs			Wealth Management			All Other			Total
	(in thousands)
Interest income	$	42,613	$	58,631	$	4,188		$	2,946		$	12,014		$	120,392
Interest expense		15,709		—		1,511			10,147			26,190			53,557
Net interest income		26,904		58,631		2,677			(7,201	)		(14,176	)		66,835
Provision for loan losses		2,336		2,821		(281	)		239			—			5,115
Non-interest income		29,536		1,888		8,036			7,286			2,113			48,859
Non-interest expense		12,978		4,467		2,227			6,027			31,360			57,059
Income (loss) before tax	$	41,126	$	53,231	$	8,767		$	(6,181	)	$	(43,423	)	$	53,520
Total assets	$	2,216,564	$	3,174,097	$	28,049		$	160,316		$	1,709,873		$	7,288,899

28

	Six-Months Ended June 30, 2008
	Operating Segments
	Community Banking		Commercial Banking		RAL and RT Programs		Wealth Management			All Other			Total
	(in thousands)
Interest income	$	59,925	$	109,749	$	110,465	$	4,814		$	29,441		$	314,394
Interest expense		22,942		—		6,334		14,395			45,169			88,840
Net interest income		36,983		109,749		104,131		(9,581	)		(15,728	)		225,554
Provision for loan losses		24,832		33,032		26,414		1,283			—			85,561
Non-interest income		11,150		3,026		115,814		15,890			1,637			147,517
Non-interest expense		20,328		9,237		75,589		13,289			68,098			186,541
Income (loss) before tax	$	2,973	$	70,506	$	117,942	$	(8,263	)	$	(82,189	)	$	100,969
Total assets	$	1,956,847	$	3,613,955	$	1,000	$	193,284		$	1,720,237		$	7,485,323

	Six-Months Ended June 30, 2007
	Operating Segments
	Community Banking		Commercial Banking		RAL and RT Programs		Wealth Management			All Other			Total
	(in thousands)
Interest income	$	90,537	$	116,100	$	118,456	$	6,227		$	25,784		$	357,104
Interest expense		31,287		2		11,112		20,205			52,269			114,875
Net interest income		59,250		116,098		107,344		(13,978	)		(26,485	)		242,229
Provision for loan losses		9,354		2,944		71,577		218			—			84,093
Non-interest income		35,965		3,050		93,502		14,927			5,669			153,113
Non-interest expense		24,849		8,376		64,229		11,478			63,021			171,953
Income (loss) before tax	$	61,012	$	107,828	$	65,040	$	(10,747	)	$	(83,837	)	$	139,296
Total assets	$	2,216,564	$	3,174,097	$	28,049	$	160,316		$	1,709,873		$	7,288,899

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

15. SUBSEQUENT EVENTS

During July 2008, the Company sold $123.7 million of MBS from the trading and AFS portfolio for a gain on sale of $132,000, which had a weighted average interest rate of 5.56% and a weighted average maturity of 25.0 years and purchased $145.8 million of MBS and placed them in the trading portfolio with a weighted average interest rate of 5.43% and a weighted average maturity of 14.3 years.  These new securities reduce the duration of the MBS portfolio and will assist with reducing the volatility from changes in the current interest rate environment.

On July 3, 2008, the Company signed an agreement to sell two retail banking branches from the Community Banking segment which are located in Santa Paula, California.  The sale is scheduled to close in October 2008, pending regulatory approval.

29

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

BUSINESS

PCB is a bank holding company.  All references to the Company or PCB apply to PCB and its subsidiaries on a consolidated basis.  The Company’s organizational structure and description of services are discussed in Item 1, “Business” and in Note 1, “Summary of Significant Accounting Policies” of the 2007 10-K and should be read in conjunction with this 10-Q.  Terms and acronyms used throughout this document are defined in the glossary on pages 53 through 55.  Throughout the MD&A of this 10-Q, there is discussion of the Company’s financial information with and without the RAL and RT programs.  When the discussion refers to the “Core Bank”, this means all of the financial activity of the consolidated financial statements excluding the RAL and RT programs.

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

Segments

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

SIGNIFICANT ACCOUNTING POLICIES

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

OVERVIEW AND HIGHLIGHTS

Net loss for the second quarter of 2008 was $5.9 million or ($0.13) per diluted share, compared with net income of $33.2 million, or $0.70 per diluted share, reported for the second quarter of 2007.  Net income for the six month period ended June 30, 2008 was $66.6 million or $1.43 per diluted share, compared with net income of $84.8 million or $1.79 per diluted share.

30

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

• increased provision for loan losses of $37.2 million for the second quarter of 2008 which reflects a provision for loan losses for the Core Bank of $43.5 million for the quarter and $59.1 million for the six month period,

• in June 2007, the Company sold the leasing loan portfolio for a gain on sale of $24.3 million,

• a decrease in interest income of $17.0 million and $42.7 million for the quarter and year to date period, respectively, primarily as the result of loans sales and transfers during 2007,

• decreased interest rates paid on deposits and borrowings resulting from the Federal Open Market Committee of the Federal Reserve System (“FOMC”) reducing the Federal funds rate from 5.25% at September 2007 gradually to 2.00% in April 2008 driving the reduction of interest expense of $14.6 million and $26.0 million for the quarter and year to date periods, respectively, and,

• an increase in volume from the RT program, which increased RT fees by $2.5 million for the quarter and $22.8 million for the comparable year to date periods.

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

RESULTS OF OPERATIONS

INTEREST INCOME

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

	Three-Months Ended June 30,
					Change
	2008		2007		$			%
	(in thousands)
Interest income:
Loans	$	89,163	$	108,545	$	(19,382	)	(17.9%)
Investment securities, trading		803		—		803		N/A
Investment securities, available-for-sale		13,259		11,550		1,709		14.8%
Other		150		297		(147	)	(49.5%)
Total	$	103,375	$	120,392	$	(17,017	)	(14.1%)

Interest income for the second quarter 2008 decreased by $17.0 million, or 14.1% compared to the second quarter of 2007 primarily due to a decline in interest income from loans of $19.4 million, or 17.9%.  The decrease in loan interest income was partially offset by increased interest income from investments of $2.4 million for the comparable quarters.  Interest income on loans declined primarily due to loan sales in 2007 and interest rate declines resulting from the Federal Reserve lowering short-term interest rates.  Interest income from commercial and consumer loans were the primary drivers of the decrease in interest income from loans for the second quarter 2008 compared to 2007.  Commercial loan interest income decreased by $10.0 million, of which $5.9 million is due to the sale of the leasing portfolio in June 2007 and $8.3 million associated with decreased interest rates for the current portfolio.  Consumer loan interest income decreased by a net amount of $4.1 million, of which $4.2 million is due to the sale of the indirect auto loan portfolio sold in May 2007 and the remainder is from decreased interest rates resulting from the Federal Reserve interest rate cuts which declined 325 basis points between the comparable periods.  Although the leasing and indirect auto loan portfolios yielded a large amount of interest income for the Community Banking segment, both portfolios required a significantly higher loan loss provision and capital to mitigate the high risk associated with those portfolios.

31

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

	Six-Months Ended June 30,
					Change
	2008		2007		$			%
	(in thousands)
Interest income:
Loans	$	283,252	$	331,465	$	(48,213	)	(14.5%)
Investment securities, trading		1,636		—		1,636		N/A
Investment securities, available-for-sale		27,345		24,538		2,807		11.4%
Other		2,161		1,101		1,060		96.3%
Total	$	314,394	$	357,104	$	(42,710	)	(12.0%)

Interest income for the six month periods ending June 30, 2008 decreased by $42.7 million, or 12.0% compared to the six month periods ending June 30, 2007 primarily due to a decline in interest income from commercial, consumer and RALs of $41.6 million, or 24.7%.  Interest income from loans declined for the comparable quarters primarily due to loan sales in 2007, interest rate declines primarily the result of the Federal Reserve rate cuts and a decline in RAL interest income. Commercial loan interest income decreased $18.5 million mostly due to the leasing loan portfolio sale in June 2007 which contributed $12.6 million of this decrease and a reduction of interest rates for adjustable rate loans attributable to the Federal Reserve decreasing short-term interest rates.  Interest income from consumer loans declined by $13.3 million primarily due to the $4.2 million decrease in interest income from indirect auto loans sale in May 2007 and a $3.9 million decline in interest income from the discontinued Holiday loan product in 2007. RAL interest income declined by $9.8 million for the six months ended June 30, 2008 compared to 2007 mostly due to a combination of changes in channel volumes and average fees collected on RALs.  The remaining decline in loan interest income was the result of small declines in commercial real estate and residential real estate loan interest due to a combination of interest rate changes and two residential real estate loan transactions which converted $353.4 million of loans to securities in the fourth quarter of 2007 and first quarter of 2008.

The increase in other interest income is due to increased investments in short-term commercial paper and overnight federal funds as a result of increased cash from collections in 2008 from the RAL and RT programs.

INTEREST EXPENSE

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

	Three-Months Ended June 30,
					Change
	2008		2007		$			%
	(in thousands)
Interest expense:
Deposits	$	18,388	$	31,416	$	(13,028	)	(41.5%)
Securities sold under agreements to repurchase (“repos”)		2,653		2,478		175		7.1%
Federal funds purchased		149		1,794		(1,645	)	(91.7%)
Long-term debt and other borrowings		17,817		17,869		(52	)	(0.3%)
Total	$	39,007	$	53,557	$	(14,550	)	(27.2%)

Interest expense for the second quarter of 2008 decreased by $14.6 million or 27.2%, to $39.0 million compared to $53.6 million for the second quarter of 2007.  This decrease in interest expense is primarily due to decreased interest rates paid on deposits. Interest rates paid on deposits decreased by 135 basis points when comparing the quarters ending June 30, 2008 to 2007.  Interest rates on deposits and short-term borrowings significantly decreased for the comparable periods due to the FOMC’s federal funds interest rate decreasing from 5.25% during a majority of 2007 to 2.00% on April 30, 2008.

32

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

	Six-Months Ended June 30,
					Change
	2008		2007		$			%
	(in thousands)
Interest expense:
Deposits	$	46,811	$	66,840	$	(20,029	)	(30.0%	)
Securities sold under agreements to repurchase		5,426		5,101		325		6.4%
Federal funds purchased		989		6,015		(5,026	)	(83.6%	)
Long-term debt and other borrowings		35,614		36,919		(1,305	)	(3.5%	)
Total	$	88,840	$	114,875	$	(26,035	)	(22.7%	)

Interest expense for the six month period ending June 30, 2008 decreased $26.0 million, or 22.7% to $88.8 million for the comparable period mostly resulting from the FOMC decreasing the federal funds rate by 325 basis points over the last 12 months.  Interest rates paid on deposits decreased by 101 basis points and was the driver of the decrease of $20.0 million, or 30.0% in deposit interest expense. As CDs with higher interest rates matured, they were replaced with new CDs at lower interest rates.  Rates paid on other transaction accounts also declined in conjunction with the FOMC rate reductions. The FOMC rate changes also directly impacted federal funds purchased which decreased interest expense by $5.0 million, or 83.6% for the comparable periods.

NET INTEREST MARGIN

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

33

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

	Three-Months Ended June 30,
	2008						2007
	Balance		Income		Rate		Balance		Income		Rate
	(dollars in thousands)
Assets:
Commercial paper	$	11,273	$	70	2.50	%	$	—	$	—	0.00	%
Federal funds sold		27,781		80	1.16	%		23,177		297	5.14	%
Securities: (1) (2)
Taxable		903,576		10,901	4.85	%		755,013		8,752	4.65	%
Non-taxable		242,584		4,679	7.72	%		207,535		4,250	8.19	%
Total securities		1,146,160		15,580	5.46	%		962,548		13,002	5.41	%
Loans: (1) (3)
Commercial (including leasing)		1,196,084		18,270	6.14	%		1,278,268		28,252	8.87	%
Real estate-multi family & commercial		2,651,373		40,592	6.12	%		2,323,490		42,874	7.38	%
Real estate-residential 1-4 family		1,135,720		16,940	5.97	%		1,309,967		19,296	5.89	%
Consumer		618,088		13,383	8.71	%		741,450		18,155	9.82	%
Other		2,802		47	6.75	%		2,797		57	8.17	%
Total loans, net		5,604,067		89,232	6.38	%		5,655,972		108,634	7.69	%
Total interest-earning assets		6,789,281		104,962	6.22	%		6,641,697		121,933	7.36	%
Market Value Adjustment		30,262						22,767
Noninterest-earning assets		609,477						620,417
Total assets	$	7,429,020					$	7,284,881
Liabilities and shareholders’ equity:
Interest-bearing deposits:
Savings and interest-bearing transaction accounts	$	2,022,724		5,387	1.07	%	$	2,120,651		13,389	2.53	%
Time certificates of deposit		1,660,121		13,001	3.15	%		1,627,040		18,027	4.44	%
Total interest-bearing deposits		3,682,845		18,388	2.01	%		3,747,691		31,416	3.36	%
Borrowed funds:
Repos and federal funds purchased		393,818		2,802	2.86	%		343,764		4,272	4.98	%
Other borrowings		1,459,321		17,817	4.91	%		1,341,392		17,869	5.34	%
Total borrowed funds		1,853,139		20,619	4.48	%		1,685,156		22,141	5.27	%
Total interest-bearing liabilities		5,535,984		39,007	2.83	%		5,432,847		53,557	3.95	%
Noninterest-bearing demand deposits		1,027,124						1,070,770
Other liabilities		138,412						115,920
Shareholders’ equity		727,500						665,344
Total liabilities and shareholders’ equity	$	7,429,020					$	7,284,881
Tax equivalent net interest income/margin				65,955	3.91	%				68,376	4.13	%
Less: non-taxable interest from securities and loans				1,587	0.09	%				1,541	0.09	%
Net interest income			$	64,368	3.82	%			$	66,835	4.04	%

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

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

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

34

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

	Three-Months Ended June 30, 2008 versus June 30, 2007
	Changes due to
	Rate			Volume			Total Change
	(in thousands)
Commercial paper	$	—		$	70		$	70
Federal funds sold		(266	)		49			(217	)
Investment securities		131			2,447			2,578
Loans, net		(17,780	)		(1,622	)		(19,402	)
Total interest-earning assets	$	(17,915	)	$	944		$	(16,971	)
Savings and interest-bearing demand transaction accounts		(7,409	)		(593	)		(8,002	)
Time certificates of deposit		(5,380	)		354			(5,026	)
		(12,789	)		(239	)		(13,028	)
Repos and Federal funds purchased		(2,019	)		549			(1,470	)
Other borrowings		(1,522	)		1,470			(52	)
		(3,541	)		2,019			(1,522	)
Total interest-bearing liabilities		(16,330	)		1,780			(14,550	)
Tax equivalent net interest income	$	(1,585	)	$	(836	)	$	(2,421	)
Loans, Core Bank	$	(18,796	)	$	(29	)	$	(18,825	)
Consumer loans, Core Bank	$	(2,793	)	$	(1,402	)	$	(4,195	)

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

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

Net Interest Margin

The FTE net interest margin for the three months ended June 30, 2008 decreased to 3.91% compared to 4.13% for the same period of 2007.  This net interest margin decrease is the result of declining interest rates received on average earning assets which decreased by 114 basis points, partially offset by declining interest rates paid on average earning liabilities which decreased by 112 basis points for the comparable three month periods.  Interest income on loans decreased by $19.4 million, or 131 basis points for the three month comparable periods ended June 30, 2008 and 2007.  Of the $19.4 million decrease, $18.0 million is attributable to decreases in interest rates received on loans.  Commercial and real estate loans secured by multi-family and commercial properties were the drivers of the decreased rates received on loans.  Interest expense on deposits decreased by $13.0 million or 135 basis points for the comparable three month periods ended June 30, 2008 compared to 2007.  Of the $13.0 million decrease, $12.8 million is attributable to decreased interest rates paid on deposits.  These decreases were primarily caused by the FOMC reducing short-term interest rates and from the sale of the high yielding indirect and leasing loan portfolios which occurred during the second quarter of 2007.

The first quarter net interest margin of each year is significantly impacted by the peak RAL activity.  RAL activity slightly impacts the second quarter of each year as most tax payers who have tax refunds file their tax returns by the April 15 filing deadline.  RALs generally have a very short duration (2-3 weeks), which cause the interest rates received on consumer loans to be significantly higher than what is anticipated for the entire year.  Due to the seasonality of the RAL product, Management has disclosed the Core Bank net interest margin, which excludes RALs in the following table.  The net interest margin for the Core Bank decreased to 3.74% for the three months ended June 30, 2008 compared to 4.01% for the same period of 2007.

35

	Three-Months Ended June 30,
	2008			2007
	(dollars in thousands)
Consolidated average earning assets	$	6,789,281		$	6,641,697
Less: RAL average earning assets		15,750			66,881
Core bank average earning assets		6,773,531			6,574,816
Consolidated tax equivalent net interest income		65,955			68,376
Less: RAL net interest income		2,926			2,677
Core bank tax equivalent, non-GAAP net interest income	$	63,029		$	65,699
Core bank net interest margin		3.74	%		4.01	%

36

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

	Six-Months Ended June 30,
	2008						2007
	Balance		Income		Rate		Balance		Income		Rate
	(dollars in thousands)
Assets:
Commercial paper	$	35,823	$	523	2.94	%	$	—	$	—	0.00	%
Federal funds sold and other earning assets		118,487		1,638	2.78	%		41,729		1,101	5.32	%
Securities: (1) (2)
Taxable		931,758		22,857	4.93	%		833,478		18,959	4.59	%
Non-taxable		234,172		8,611	7.35	%		207,751		8,476	8.16	%
Total securities		1,165,930		31,468	5.42	%		1,041,229		27,435	5.30	%
Loans: (1) (3)
Commercial (including leasing)		1,193,392		39,268	6.62	%		1,305,595		57,782	8.92	%
Real estate-multi family & commercial		2,592,855		81,421	6.28	%		2,290,275		84,464	7.38	%
Real estate-residential 1-4 family		1,109,025		33,235	5.99	%		1,266,741		36,858	5.82	%
Consumer		801,503		129,325	32.45	%		1,412,189		152,433	21.77	%
Other		3,888		120	6.21	%		2,879		110	7.70	%
Total loans		5,700,663		283,369	9.97	%		6,277,679		331,647	10.62	%
Total earning assets		7,020,903		316,998	9.08	%		7,360,637		360,183	9.87	%
SFAS 115 Market Value Adjustment		29,687						22,427
Non-earning assets		591,551						585,078
Total assets	$	7,642,141					$	7,968,142
Liabilities and shareholders’ equity:
Interest-bearing deposits:
Savings and interest-bearing transaction accounts	$	2,063,403		14,424	1.41	%	$	2,096,947		25,939	2.49	%
Time certificates of deposit		1,802,906		32,387	3.61	%		1,820,524		40,901	4.53	%
Total interest-bearing deposits		3,866,309		46,811	2.43	%		3,917,471		66,840	3.44	%
Borrowed funds:
Repos and federal funds purchased		391,671		6,415	3.29	%		434,280		11,116	5.16	%
Other borrowings		1,427,439		35,614	5.02	%		1,396,961		36,919	5.33	%
Total borrowed funds		1,819,110		42,029	4.65	%		1,831,241		48,035	5.29	%
Total interest-bearing liabilities		5,685,419		88,840	3.14	%		5,748,712		114,875	4.03	%
Non-interest-bearing demand deposits		1,196,280						1,229,658
Other liabilities		46,166						339,309
Shareholders’ equity		714,276						650,463
Total liabilities and shareholders’ equity	$	7,642,141					$	7,968,142
Tax equivalent net interest income/margin				228,158	6.54	%				245,308	6.72	%
Less: tax equivalent income included in interest income from non-taxable securities and loans				2,604	0.07	%				3,079	0.09	%
Net interest income			$	225,554	6.47	%			$	242,229	6.63	%

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

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

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

37

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

	Six-Months Ended
	June 30, 2008 versus June 30, 2007
	Changes due to
	Rate			Volume			Total Change
	(in thousands)
Commercial paper	$	—		$	523		$	523
Federal funds sold		(726	)		1,263			537
Investment securities		623			3,410			4,033
Loans, net		31,743			(80,021	)		(48,278	)
Total interest-earning assets	$	31,640		$	(74,825	)	$	(43,185	)
Savings and interest-bearing demand transaction accounts		(11,106	)		(409	)		(11,515	)
Time certificates of deposit		(8,127	)		(387	)		(8,514	)
		(19,233	)		(796	)		(20,029	)
Repos and Federal funds purchased		(3,700	)		(1,001	)		(4,701	)
Other borrowings		(2,124	)		819			(1,305	)
		(5,824	)		(182	)		(6,006	)
Total interest-bearing liabilities		(25,057	)		(978	)		(26,035	)
Tax equivalent net interest income	$	56,697		$	(73,847	)	$	(17,150	)
Loans, Core Bank	$	(33,651	)	$	(4,933	)	$	(38,584	)
Consumer loans, Core Bank	$	(6,839	)	$	(6,575	)	$	(13,414	)

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

Net Interest Margin

The FTE net interest margin for the six months ended June 30, 2008 decreased to 6.54% compared to 6.72% for the same period of 2007.  This decrease is a result of declining interest rates received on earning assets in combination with a decline in total interest earning assets partially offset by decreased interest rates paid on deposits and borrowings.  Average loans decreased by $577.0 million for the comparable periods due to the end of RALs peak season and from loan sales.  The first and second quarters’ net interest margin of each year is significantly impacted by the RAL activity that peaks during the first quarter of each year.  RALs generally have a very short duration (2-3 weeks), which cause the interest rates received on consumer loans to be significantly higher than what is anticipated for the entire year.  Interest expense decreased by $26.0 million during the comparable six month periods ended June 30, 2008 and 2007, of which $25.1 million or 89 basis points are attributable to decreased interest rates.

38

	Six-Months Ended June 30,
	2008			2007
	(dollars in thousands)
Consolidated average earning assets	$	7,020,903		$	7,360,637
Less: RAL average earning assets		203,387			645,418
Core bank average earning assets		6,817,516			6,715,219
Consolidated tax equivalent net interest income		228,158			245,308
Less: RAL net interest income		104,131			107,344
Core bank tax equivalent, non-GAAP net interest income	$	124,027		$	137,964
Core bank net interest margin		3.66	%		4.14	%

The net interest margin for the Core Bank decreased to 3.66% for the three months ended June 30, 2008 compared to 4.14% for the same period of 2007.  Due to the seasonality of the RAL product, Management has disclosed the Core Bank net interest margin, which excludes RALs in the preceding table.  The Core Bank’s FTE net interest income was $124.0 million, a decrease of $13.9 million.  The main driver of this decrease is a decline in loan interest rates from 7.60% at June 30, 2007 to 6.36% at June 30, 2008 offset by a decrease in loan volume, which is attributable to the sale and transfer of the leasing, indirect auto and residential real estate loan portfolios in 2007.  Commercial and real estate secured multi-family and commercial loan portfolios caused a majority of the decrease.  At the same time, interest rates paid on deposits, and borrowings also decreased, partially offsetting the decreased interest income from loans.

PROVISION FOR LOAN LOSSES

Quarterly, the Company determines the amount of allowance for loan losses adequate to provide for losses inherent in the Company’s loan portfolios.  The provision for loan losses is determined by the net change in the allowance for loan losses.  For a detailed discussion of the Company’s allowance for loan losses, refer to the “Significant Accounting Policies” discussion in Note 1, “Summary of Significant Accounting Policies” in the 2007 10-K and in the MD&A allowance for loan loss discussion of this Form 10-Q on page 44.

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

	Three-Months Ended June 30,
							Change
	2008			2007			$			%
	(in thousands)
Provision for loan losses:
Core Bank	$	43,545		$	5,396		$	38,149		707.0%
RAL		(6,378	)		(281	)		(6,097	)	N/A
Total	$	37,167		$	5,115		$	32,052		626.6%

Provision for loan losses were $37.2 million for the three month period ended June 30, 2008 compared to $5.1 million for the three month period ended June 30, 2007, an increase of $32.1 million.  The increased provision for loan losses was driven by the slowing economy causing the Core Bank’s loan portfolio to experience higher than anticipated loan losses offset by increased recoveries for RALs due to enhanced credit screening procedures put in place for the 2008 RAL season.  Provision for loan losses for the Core Bank increased by $38.1 million for the second quarter 2008 compared to 2007.  The Core Bank’s loan portfolio has been impacted negatively primarily by increased net charge-offs of $28.5 million during the second quarter of 2008, which mostly impacted the loan portfolios in the Community and Commercial Banking segments.  A summary of the loan portfolios significantly impacted by the net charge-offs during the quarter include approximately $10.4 million of commercial loans, $9.9 million of construction loans, $4.8 million of residential real estate loans and $2.3 million of home equity loans. Included in commercial and construction loans are loans with home builders and land loans. The remainder of the increase in provision for loan losses is attributable to the qualitative factors portion of the allowance for loan losses model, which is mostly due to the deterioration in the economy.

39

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

	Six-Months Ended June 30,
					Change
	2008		2007		$			%
	(in thousands)
Provision for loan losses:
Core Bank	$	59,147	$	12,516	$	46,631		372.6%
RAL		26,414		71,577		(45,163	)	(63.1%)
Total	$	85,561	$	84,093	$	1,468		1.7%

For the year-to-date periods ending June 30, 2008 and 2007, provision for loan losses were $85.6 million and $84.1 million, an increase of $1.5 million or 1.7%.  This slight increase was caused by a significant increase in provision for loan losses for the Core Bank of $46.6 million, which was offset by a significant decrease in the RAL provision for loan losses of $45.2 million for the comparable periods.  The Core Bank’s loan portfolio had $30.7 million of net charge-offs in 2008 and required additional provision for loan losses as a result of the downturn in the economy.  At the same time, the RALs have experienced less charge-offs than in previous years due to the enhanced credit controls put into place by the Company for the 2008 RAL season, which has reduced the provision for loan losses for RALs.  Provision for loan losses for RALs for the six month periods ending June 30, 2008 and 2007 were $26.4 million and $71.6 million, a decrease of $45.2 million or 63.1%.  The enhanced credit risk controls for RALs resulted in a decline of net charge-offs of $26.4 million for the six month period ended June 30, 2008, compared to $69.6 million for the six month period ended June 30, 2007.

NON-INTEREST INCOME

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

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

	Three-Months Ended June 30,
							Change
	2008			2007			$			%
	(in thousands)
Non-interest income:
Service charges and fees	$	9,067		$	10,427		$	(1,360	)	(13.0%)
Refund transfer fees		8,636			6,168			2,468		40.0%
Gain on sale of leasing portfolio		—			24,344			(24,344	)	(100.0%)
Trust and investment advisory fees		6,655			5,944			711		12.0%
Loss on securities, net		(2,773	)		(2	)		(2,771	)	N/A
Other		616			1,978			(1,362	)	(68.9%)
Total	$	22,201		$	48,859		$	(26,658	)	(54.6%)

Total non-interest income was $22.2 million for the three months ended June 30, 2008 compared to $48.9 million for the same period in 2007, a decrease of $26.7 million or 54.6%.  This decrease is mostly attributed to the gain on sale of the leasing loan portfolio which occurred in June 2007.  In addition, net loss on securities increased $2.8 million mostly due to additional impairment of MBS AFS securities of $2.6 million when comparing the second quarter of 2008 to 2007.  The

40

MBS AFS impairment is from valuation adjustments due to changes in interest rates and Management’s decision to sell MBS securities which are in a loss position.  The impairment charge was not due to the credit quality of the underlying loans of the MBS AFS portfolio.

The decrease in non-interest income was offset by an increase of RT fees of $2.5 million.  The increase in RT fees occurred due to increased volume of 131,000 RT transactions when comparing the activity during the second quarter of 2008 to 2007.  The increased volume of RTs is partially the result of the Company’s enhanced credit risk management controls, which impacted RAL declines and increased RT volumes.

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

	Six-Months Ended June 30,
					Change
	2008		2007		$			%
	(in thousands)
Non-interest income:
Refund transfer fees	$	68,191	$	45,386	$	22,805		50.2%
Gain on sale of RALs, net		44,580		41,822		2,758		6.6%
Gain on sale of leasing portfolio		—		24,344		(24,344	)	(100.0%)
Service charges and fees		19,191		23,108		(3,917	)	(17.0%)
Trust and investment advisory fees		13,286		12,174		1,112		9.1%
Gain on securities, net		66		1,939		(1,873	)	(96.6%)
Other		2,203		4,340		(2,137	)	(49.2%)
Total	$	147,517	$	153,113	$	(5,596	)	(3.7%)

Total non-interest income was $147.5 million for the six months ended June 30, 2008 compared to $153.1 million for the same period in 2007, a decrease of $5.6 million or 3.7%.  The main driver of this decrease is the gain on sale of the leasing portfolio from June 2007 of $24.3 million.  This decrease was offset by an increase of RT fees of $22.8 million or 50.2% from $45.4 million for the six month period ending June 30, 2007 to $68.2 million for the same period of 2008.  The increase in RT fees occurred due to increased volume of RTs.  The number of RT transactions increased by 1.5 million, or 31.1% when comparing the six month period ended June 30, 2008 to June 30, 2007.

The decrease in non-interest income was also impacted by a decrease in service charges and fees of $3.9 million when comparing the six month period ended June 30, 2008 to June 30, 2007.  This decrease was primarily caused by lower collection fees on RALs which occurred due to contract changes and a decrease in the number of participants involved in the cross-collection program.  RAL collection fees are earned from the collection of previous years’ charged-off RALs for participants of the cross-collection program.

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

41

NON-INTEREST EXPENSE

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

	Three-Months Ended June 30,
					Change
	2008		2007		$			%
	(in thousands)
Non-interest expense:
Salaries and employee benefits	$	31,314	$	31,081	$	233		0.7%
Refund program marketing and technology fees		1,257		13		1,244		N/A
Occupancy expenses, net		6,506		5,579		927		16.6%
Furniture, fixtures and equipment, net		1,975		2,610		(635	)	(24.3%)
Other		23,632		17,776		5,856		32.9%
Total	$	64,684	$	57,059	$	7,625		13.4%

The Company’s non-interest expenses increased by $7.6 million, or 13.4% for the second quarter of 2008 compared to the second quarter of 2007.  The majority of this increase is due to increased other expenses of $5.9 million, or 32.9%, to $23.6 million for the three months ended June 30, 2008, compared to $17.8 million for the same period in 2007.  The increase in other expenses is primarily due to increased expenses for the true-up of software depreciation of $2.4 million, RAL developer performance fees of $2.4 million, reserve for off-balance sheet commitments of $1.1 million and additional costs associated with the bank’s implementation of branch capture item processing.

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

	Six-Months Ended June 30,
					Change
	2008		2007		$			%
	(in thousands)
Non-interest expense:
Salaries and employee benefits	$	66,006	$	66,881	$	(875	)	(1.3%)
Refund program marketing and technology fees		46,257		44,500		1,757		3.9%
Occupancy expenses, net		13,014		10,888		2,126		19.5%
Furniture, fixtures and equipment, net		4,580		5,076		(496	)	(9.8%)
Other		56,684		44,608		12,076		27.1%
Total	$	186,541	$	171,953	$	14,588		8.5%

The Company’s non-interest expenses for the year-to-date 2008 period compared to 2007 increased by $14.6 million, or 8.5%.  The majority of this increase is due to increased other expenses of $12.1 million or 27.1%, to $56.7 million for the six months ended June 30, 2008, compared to $44.6 million for the same period in 2007.  The increase in other expenses is primarily due to increases in RAL and RT developer performance fees of $7.4 million, reserve for off-balance sheet commitments of $3.5 million, software expense of $1.6 million, and other expenses of $966,000.  The increase in RAL and RT performance fees is the result of contractual volume incentive fee increases due to the increased volume for the 2008 RAL season.  The Company recorded additional expense to increase the off-balance sheet reserve compared to the second quarter of 2007.  This increase is primarily the result of a change in the reserve methodology for off-balance sheet commitments as disclosed in Note 5, “Loans” of this Form 10-Q.

PROVISION FOR INCOME TAXES

The Company recorded a $9.4 million tax benefit for the second quarter of 2008 compared to tax expense of $20.4 million for the second quarter of 2007.  For the six months ended June 30, 2008, the Company incurred tax expense of $34.4 million compared to $54.5 million for the comparable period in 2007.  The decrease in tax expense for the comparable periods is attributable to decreased pretax income and to a change in the Company’s effective rate for 2008 to 34.05%

42

compared to 2007’s full year tax rate of 35.77%.  The change in effective tax rate is attributable to a reduction in the Company’s projected 2008 pretax income and to increased low-income housing partnership tax credits.

BALANCE SHEET ANALYSIS

Total assets increased $111.0 million and total liabilities increased by $69.7 million since December 31, 2007.  The major components causing these increases are described in the following sections.

SECURITIES

The Company’s trading and AFS investment securities portfolio declined $58.7 million, or 5.0% to $1.12 billion at June 30, 2008, compared to December 31, 2007.  The decline is the net result of $238.6 million of called and matured securities from the U.S.  Agency AFS portfolio, principal payments of $32.1 million mostly from the MBS portfolio partially offset by purchases of $222.2 million of U.S.  Agency and tax-exempt AFS investment securities and a decrease of the fair market value of the AFS portfolio of $11.8 million.

The Company’s trading securities portfolio decreased by $84.5 million, or 57.6% to $62.3 million at June 30, 2008 compared to December 31, 2007.  This decrease occurred as a result of MBS sales of $146.7 million in the first quarter of 2008 offset by the addition of $67.6 million of MBS securities received in the settlement of a residential real estate loan conversion transaction and principal payments of $6.6 million since December 31, 2007.

Additional information related to the Company’s securities portfolios is included in Note 4, “Securities” of the Company’s Consolidated Financial Statements.  All of the transactions of the securities portfolios are managed by the finance department.  Earnings on the securities are reported in the “All Other” column in Note 14, “Segments” of this 10-Q.

LOAN PORTFOLIO

Loans Held for Investment

The following table summarized loans held for investment:

	June 30, 2008		December 31, 2007		Change
					$			%
	(in thousands)
Real estate:
Residential—1 to 4 family	$	1,175,267	$	1,075,663	$	99,604		9.3%
Multi-family residential		279,922		278,935		987		0.4%
Commercial		1,713,846		1,558,761		155,085		9.9%
Construction		677,678		651,307		26,371		4.0%
Commercial & industrial loans		1,233,030		1,196,808		36,222		3.0%
Home equity loans		413,832		394,331		19,501		4.9%
Consumer loans		196,066		200,094		(4,028	)	(2.0%)
RALs		1,000		—		1,000		N/A
Other loans		2,411		3,257		(846	)	(26.0%)
Total loans	$	5,693,052	$	5,359,156	$	333,896		6.2%

Total loans increased by $333.9 million from December 31, 2007 to June 30, 2008.  A majority of the growth in the loan portfolio was in commercial real estate, residential real estate, and commercial and industrial loans of $290.9 million.  The growth in the loan portfolio is due to the Bank’s strong capital position and competitive pricing of interest rates on loans.

The Company offers loans to individuals and small to medium size businesses.  The Community Banking segment consists of residential mortgage loans, personal lines of credit, equity lines, equity loans, and automobile loans.  The Commercial Banking segment consists of commercial lines of credit, letters of credit, small business lending and asset-based lending products.  The Wealth Management segment serves customers who meet certain net-worth, income and liquidity criteria and, there are not specific loan types offered to the customers served in this segment.  A more detailed description of each segment and the loan products offered is disclosed in the 2007 10-K.

43

Loans Held for Sale

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

ALLOWANCE FOR LOAN LOSSES (“ALLL”)

Total ALLL increased by $28.4 million to $73.3 million at June 30, 2008 from $44.8 million at December 31, 2007.  The increase to ALLL is primarily due to increased net charge-offs of $29.4 million during the second quarter of 2008, an increase in nonperforming assets of $85.1 million since December 31, 2007 and an increase in the qualitative factors related to the deterioration of the economy.

NON-PERFORMING LOANS

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

	June 30, 2008			March 31, 2008			December 31, 2007			June 30, 2007
	(in thousands)
Nonaccrual loans	$	136,300		$	159,508		$	72,186		$	20,690
Loans past due 90 days or more on accrual status		749			1,240			1,131			747
Troubled debt restructured loan		21,050			—			—			—
Total nonperforming loans		158,099			160,748			73,317			21,437
Foreclosed collateral		3,695			2,910			3,357			2,967
Total nonperforming assets	$	161,794		$	163,658		$	76,674		$	24,404
Allowance for loan losses, Core Bank	$	73,288		$	58,276		$	44,843		$	41,556
Allowance for loan losses, RALs		—			7,215			—			1,993
Total allowance for loan losses, Consolidated	$	73,288		$	65,491		$	44,843		$	43,549
COMPANY RATIOS—Consolidated:
Coverage ratio of allowance for loan losses to total loans		1.29	%		1.18	%		0.84	%		0.80	%
Coverage ratio of allowance for loan losses to nonperforming loans		46	%		41	%		61	%		203	%
Ratio of nonperforming loans to total loans		2.78	%		2.90	%		1.37	%		0.39	%
Ratio of nonperforming assets to total assets		2.16	%		2.21	%		1.04	%		0.33	%
COMPANY RATIOS—Core Bank:
Coverage ratio of allowance for loan losses to total loans		1.29	%		1.06	%		0.84	%		0.76	%
Coverage ratio of allowance for loan losses to nonperforming loans		46	%		36	%		61	%		194	%
Ratio of nonperforming loans to total loans		2.78	%		2.93	%		1.37	%		0.39	%
Ratio of nonperforming assets to total assets		2.16	%		2.27	%		1.04	%		0.35	%

Total non-performing loans increased to $158.1 million at June 30, 2008 from $73.3 million at December 31, 2007, an increase of $84.8 million.  During the first six months of 2008, residential construction loan relationships (home building industry) contributed to the increase in non-performing loans.  The troubled debt restructured loan of $21.1 million is also a residential construction loan relationship that was first reported as a nonaccrual loan at March 31, 2008.  As shown in the table on the following page as of June 30, 2008, the allowance for loan losses was 1.29% of total loans.  This is an increase of 45 basis points from 0.84% at December 31, 2007 and is mostly attributable to an

44

increase in the ALLL calculation associated with economic and collateral factors to compensate for the broad scale downturn of the economy impacting all loan portfolios.

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

Collection efforts continue even after charge-off.

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

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

DEPOSITS

The following table summarizes the deposits.

	June 30, 2008		December 31, 2007		Change
					$			%
	(in thousands)
Non-interest bearing deposits	$	991,570	$	1,002,281	$	(10,711	)	-1.1%
Interest-bearing deposits:
NOW accounts		1,037,582		1,145,655		(108,073	)	-9.4%
Money market deposit accounts		631,925		748,417		(116,492	)	-15.6%
Other savings deposits		240,795		254,273		(13,478	)	-5.3%
Time certificates of $100,000 or more		1,204,150		1,063,271		140,879		13.2%
Other time deposits		533,177		749,915		(216,738	)	-28.9%
Total deposits	$	4,639,199	$	4,963,812	$	(324,613	)	-6.5%

The Company’s deposits decreased by $324.6 million, or 6.5% from December 31, 2007 to June 30, 2008.  The decrease is mostly attributed to the maturity of $189.6 million of brokered certificates of deposit used to fund the RAL program which are included in other time deposits.  Brokered certificates of deposit are large short-term deposits which assist with providing funding for the RAL and RT Programs during the first quarter of each year.  The Company’s deposits at June 30, 2008 were $4.64 billion and $4.78 billion at June 30, 2007, a decrease of $144.8 million or 3.0%.  The overall decline in deposits is also attributable to continued competition in the financial services industry to attract and retain new deposits.  Time certificates of $100,000 or more increased by $140.9 million when comparing the balances at June 30, 2008 to December 31, 2007.  The increase in time certificates of deposits of $100,000 or more is the result of the Bank’s CD campaigns that have attracted new customers and are providing cross-selling opportunities for our other deposit, loan and wealth management products.

FEDERAL FUNDS PURCHASED

Federal funds purchased increased $61.4 million or 902.2% from $6.8 million at December 31, 2007.  This increase is attributable to the strong loan growth since December 31, 2007.  The Company utilizes Federal funds purchased as a short-term funding solution for loans and securities.

45

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase were $356.6 million at June 30, 2008, an increase of $90.7 million since December 31, 2007.  Since December 31, 2007, securities sold under agreements to repurchase have been used as both a short-term and long-term funding source for the growth in loans.  Long-term securities sold under agreements to repurchase have increased $150.0 million due to additional and renewed long-term commitments with a weighted average rate of 2.86%, contributing to the decrease of interest expense.  This increase was offset by a decrease in short-term borrowings of securities sold under agreements to repurchase of $59.3 million.

CAPITAL RESOURCES

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

Capital Adequacy Standards

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

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

	Total Capital		Tier 1 Capital		Risk Weighted Assets		Tangible Average Assets		Total Capital Ratio		Tier 1 Capital Ratio		Tier 1 Leverage Ratio
	(dollars in thousands)
June 30, 2008
PCB (consolidated)	$	790,822	$	608,865	$	6,026,212	$	7,255,011	13.1	%	10.1	%	8.4	%
PCBNA		782,332		600,438		6,021,133		7,244,123	13.0	%	10.0	%	8.3	%
December 31, 2007
PCB (consolidated)	$	720,625	$	568,075	$	5,847,905	$	7,126,286	12.3	%	9.7	%	8.0	%
PCBNA		701,225		548,675		5,841,648		7,109,129	12.0	%	9.4	%	7.7	%
Well-capitalized ratios									10.0	%	6.0	%	5.0	%
Minimum capital ratios									8.0	%	4.0	%	4.0	%

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

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

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

PCB is the parent company and sole owner of PCBNA.  However, there are legal limitations on the amount of dividends, which may be paid by PCBNA to PCB.  The amounts that may be paid as dividends by a bank are determined based on the bank’s capital accounts and earnings in prior years.  As of June 30, 2008, PCBNA would have been permitted to pay up to $388.7 million as dividends to PCB.

46

Stock Repurchases

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

Future Sources and Uses of Capital and Expected Ratios

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

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

In addition to the capital generated from the operations of the Company, a secondary source of capital growth has been the exercise of employee and director stock options. For the period of January 1, 2008 to June 30, 2008, the increase to capital from the exercise of options was $182,000.

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

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

Impact of RAL/RT Programs on Capital Adequacy

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

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

LIQUIDITY

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

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

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

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

47

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

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

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

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

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

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

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

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

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

As of June 30, 2008, the Company’s liquidity ratio, which is the ratio of liquid assets of cash and cash equivalents, investment securities from the trading and AFS portfolios and loans held for sale divided by short-term liabilities of demand deposits, repurchase agreements and federal funds purchased was 40.0%, compared to 44.8% at December 31, 2007. The Company’s liquidity ratio decreased in June 2008 compared to December 2007 as a result of a decrease in investment securities and the sale of the loans held for sale at December 31, 2007. Total available liquidity as of June 30, 2008 was $1.33 billion.

At June 30, 2008, the Company had available borrowing capacity of $532.8 million at the FHLB and $822.8 million of borrowing capacity with the FRB. This borrowing capacity is utilized to fund loans when loan growth outpaces deposit growth.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

48

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

INTEREST RATE RISK

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

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

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

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

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

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

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

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

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

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

49

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

RATE SENSITIVITY SUMMARY

50

The EVE value at risk at June 30, 2008 was within the adopted ALCO policy ranges at negative 3.7% for the down 200 basis points (“DN 200”) and at negative 8.6% for the up 200 basis points (“UP 200”) scenarios.  However, the previous year EVE at June 30, 2007 was above the policy limits in the UP 200 scenario at negative 19.2%.  An update to the model’s deposit decay assumptions in August 2007 revealed durations of the Company’s non-maturity deposits had extended, thus improving the EVE in a rising rate environment within the policy limit.  To further mitigate exposure in a rising rate environment, the Company sold fixed rate mortgages in the last quarter of 2007.

As noted in the table above, the Company’s net interest income (NII) exposure has surpassed our IRR policy limit as of June 30, 2008.  The DN 200 scenario corresponds to an instantaneous and parallel rate shock of 200 basis points where Fed Funds reaches 0%.  Even though this economic scenario is highly unlikely, our IRR policy requires that we monitor the NII for a period of 90 days prior to initiating corrective action.  Management is currently monitoring this situation as required by policy.

The simulation indicates a 1.9% improvement in the Up 200 scenario for NII over the next twelve months, using a scenario in which the Federal funds rate immediately increases 200 basis points to 4%.  Net economic value at risk however is well within the adopted ALCO policy ranges.  At June 30, 2007, both DN 200 and UP 200 scenarios were within the ALCO adopted policy limits.

The Company does not currently have any derivative instruments to assist with managing interest rate risk.  The derivative instruments the Company does have are offsetting instruments between the Company and certain commercial customers and the Company and a third party.  Changes in these derivative instrument’s market values are recorded in the balance sheet with no income statement impact for the Company.  The associated interest income and interest expense for these derivative instruments are recorded in the Company’s income statement.  The Company had $147.2 million notional amount of these derivative instruments at June 30, 3008.  These instruments are not specifically addressed in the Company’s interest rate risk model.  These derivatives have been reviewed and included in the calculation of the Company’s off-balance sheet credit risk model.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

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

51

and forms and that such information is accumulated and communicated to Management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in internal control over financial reporting

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

52

GLOSSARY

AFS: Available for sale.

ALLL: Allowance for loan losses.

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

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

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

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

CD: Certificates of Deposit.

CMO: Collateralized Mortgage Obligations.

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

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

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

FASB: Financial Accounting Standards Board.

FBSLO: First Bank of San Luis Obispo.

FDICIA: Federal Deposit Insurance Corporation Improvement Act.

FHLB: Federal Home Loan Bank.

FNB: First National Bank of Central California.

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

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

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

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

FVO: Fair value option.

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

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

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

IRS: Internal Revenue Service.

JH: Jackson Hewitt.

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

MBS: Mortgage Backed Security.

MCM: Morton Capital Management.

MD&A: Management Discussion and Analysis.

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

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

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

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

NOW: Interest-bearing checking accounts.

OCI: Other Comprehensive Income.

53

PCB: Pacific Capital Bancorp.

PCBNA: Pacific Capital Bank, National Association.

PCCI: Pacific Crest Capital, Inc.

PER: Self filers of tax returns.

PRO: Other professional tax preparers.

RAL: Refund anticipation loan.

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

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

Repos: Securities sold under agreements to repurchase.

REWA: R.E. Wacker Associates.

RT: Refund transfer.

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

financial reporting and corporate governance on all corporations.

SBA: Small Business Administration.

SBB: San Benito Bank.

SBB&T: Santa Barbara Bank & Trust.

SEC: Securities and Exchange Commission.

SFAS: Statement of Financial Accounting Standard.

SVNB: South Valley National Bank.

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

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

TT&L: Treasury Tax and Loans.

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

Wholesale borrowing: Borrowings from other financial institutions.

54

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company’s Annual Meeting of Shareholders was held on April 29, 2008.  A total of 46,627,686 shares of common stock were outstanding and entitled to vote as of March 3, 2008, the record date for this meeting.  The following matters were submitted to a vote of the shareholders:

Proposal 1:	Election of eleven (11) directors to serve for a term of one year; and
Proposal 2:	Ratification of the selection of Ernst & Young LLP as the Company’s independent registered accounting firm for the year ending December 31, 2008.
Proposal 3:	Approval of the Pacific Capital Bancorp Equity Incentive Plan.
Proposal 4:	Approval of the 2007 Performance-Based Annual Incentive Compensation Plan.

The results of the voting were:

Proposal 1: At this meeting, each of the following nominees was elected to serve on the Company’s Board of Directors until the next Annual Meeting and until his or her successor is elected and qualified:

Name	For	Withheld
Edward E.   Birch	37,490,054	2,457,233
Richard S.  Hambleton, Jr.	38,760,261	1,187,026
D.  Vernon Horton	36,450,467	3,496,820
Roger C.  Knopf	38,747,369	1,199,918
Robert W.  Kummer, Jr.	38,703,636	1,243,651
Clayton C.  Larson	36,645,321	3,301,966
George S.  Leis	37,493,960	2,453,327
John R.  Mackall	36,870,438	3,076,849
Lee E.  Mikles	38,650,055	1,297,232
Richard A.  Nightingale	38,715,298	1,231,989
Kathy J.  Odell	38,579,530	1,367,757

55

Proposal 2: At this meeting, the ratification of Ernst & Young LLP as the Company’s independent registered accounting firm for the year ending December 31, 2008 was approved by the Company’s shareholders:

For	Against	Abstain
39,495,511	214,412	237,364

Proposal 3: At this meeting, the 2008 Equity Incentive Plan was approved by the Company’s shareholders:

For	Against	Abstain	Broker   Non-Votes
26,783,260	3,933,910	684,219	8,545,898

Proposal 4: At this meeting, the 2007 Performance-Based Annual Incentive Compensation Plan was approved by the Company’s shareholders:

For	Against	Abstain
32,779,415	6,441,161	726,711

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit Number	Description
3.1	A complete amended and restated Bylaws of Pacific Capital Bancorp effective May 22, 2008 is herein incorporated by reference filed on Form 8-K on May 22, 2008 under Item 5.03 and Item 9.01 as Exhibit 99.1.
10.1	Form of Notice of Grant and Restricted Stock Agreement for Non-employee Directors for the 2008 Equity Incentive Plan.
10.2	Form of Restricted Stock Agreement for Employees for the 2002 Equity Incentive Plan as amended on July 21, 2004, September 19, 2005 and December 12, 2006.
10.3	Form of Stock Option Agreement for Employees for the 2002 Equity Incentive Plan as amended on July 21, 2004, September 19, 2005 and December 12, 2006.
31.	Certifications pursuant to Section 302 of Sarbanes-Oxley Act of 2002
	31.1 Certification of George S. Leis
	31.2 Certification of Stephen V. Masterson
32.	Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002
	32.1 Certification of George S. Leis and Stephen V. Masterson

SIGNATURES

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

PACIFIC CAPITAL BANCORP

/s/ George S. Leis	August 8, 2008
George S. Leis
President and Chief Executive Officer
/s/ Stephen V. Masterson	August 8, 2008
Stephen V. Masterson
Executive Vice President and Chief Financial Officer

56