Pacific Capital Bancorp (PCBC)

CAPITAL RESOURCES

As of September 30, 2007, under current regulatory definitions, the Company and PCBNA were “well-capitalized,” in the highest of the five categories defined under the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”). The following table presents a comparison of regulatory ratios for September 30, 2007 and December 31, 2006. These regulatory ratios are monitored and regulated by the Board of Governors of the Federal Reserve System (“FRB”) as discussed in the Company’s 2006 10-K.

CAPITAL RESOURCES

As of June 30, 2007, under current regulatory definitions, the Company and PCBNA were “well-capitalized,” the highest of the five categories defined under the Federal Deposit Insurance Corporation Improvement Act (FDICIA). The following table presents a comparison of regulatory ratios for June 30, 2007 and December 31, 2006. These regulatory ratios are monitored and regulated by the Board of Governors of the Federal Reserve System (FRB) as discussed in our 2006 10-K.

CAPITAL RESOURCES

As of March 31, 2007, under current regulatory definitions, the Company and PCBNA were “well-capitalized,” the highest of the five categories defined under the Federal Deposit Insurance Corporation Improvement Act (FDICIA). The following table presents a comparison of regulatory ratios for March 31, 2007 and December 31, 2006. These regulatory ratios are monitored and regulated by the Board of Governors of the Federal Reserve System (FRB) as discussed in our 2006 10-K.

CAPITAL RESOURCES

As of March 31, 2007, under current regulatory definitions, the Company and PCBNA were “well-capitalized,” the highest of the five categories defined under the Federal Deposit Insurance Corporation Improvement Act (FDICIA). The following table presents a comparison of regulatory ratios for March 31, 2007 and December 31, 2006. These regulatory ratios are monitored and regulated by the Board of Governors of the Federal Reserve System (FRB) as discussed in our 2006 10-K.

CAPITAL RESOURCES

As of December 31, 2006, under current regulatory definitions, the Company and PCBNA were “well-capitalized,” the highest of the five categories defined under the Federal Deposit Insurance Corporation Improvement Act (FDICIA).

Capital Adequacy Standards

The primary measure of capital adequacy for regulatory purposes is based on the ratio of total risk-based capital to risk-weighted assets. The risk-based capital ratio is impacted by three factors: (1) the growth in assets compared to the growth in capital; (2) the relative size of the various asset categories; and (3) the composition of the securities portfolios.

The Company, as a bank holding company, is required by the FRB to maintain a total risk-based capital to risk-weighted asset ratio of at least 8.0%. To be considered “well-capitalized”, the ratio must be at least 10%. At the end of 2006, the Company’s total risk-based capital to risk-weighted asset ratio was 11.7%. The Company also must maintain a Tier I capital to risk-weighted asset ratio of 6% and a Tier I capital to average assets of 5% to be considered well capitalized. The actual ratios at December 31, 2006 for the Company were 8.8% and 7.4%, respectively.

Based on average balances the Company has maintained equity to asset ratios of 8.25%, 8.08%, and 7.59% for the years ended December 31, 2006, 2005, and 2004, respectively.

The composition of Tier I and Tier II capital, the minimum levels established by the FRB, the minimum levels necessary to be considered well-capitalized by regulatory definition, and the Company’s ratios as of December 31, 2006 and 2005 are presented in Note 20, Regulatory Capital Requirements on page 102.

PCBNA is also required to maintain a total risk-based capital to risk-weighted asset ratio of 10.0% to be considered well capitalized. PCBNA’s ratio at the end of 2006 was 11.47%. The Bank has issued a total of $121.0 million in subordinated debt. Each issue had a maturity of 10 years. While shown on the consolidated balance sheets as long-term debt, for the first half of their 10-year terms they are included as Tier II capital in the computation of the Total Capital to Risk-Weighted Asset ratio for both the Company and PCBNA. In the final five years their terms, one fifth of the balance will be excluded each year from Tier II capital in this computation. As of the end of 2006, all issues except one were still within the first five years of their term. The one issue was between four and five years remaining maturity. The subordinated debt issued by the Bancorp was issued in connection with the issuance of trust-preferred debt as described in Note 14, Long-term Debt and Other Borrowings in our Financial Statements. Subsidiary trusts are not consolidated with the Company as described in Note 1, Significant Accounting Policies, within the description of Consolidation of Subsidiaries of our Financial Statements. In July 2006, the Company refinanced $39.2 million in trust-preferred debt, which count as Tier I capital for the Company for their full term.

Share Repurchases

In prior years, the Company occasionally repurchased shares of its common stock to offset the increased number of shares issued as a result of the exercise of employee stock options and as part

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of its dividend reinvestment program. Share purchases are generally conducted as open-market transactions.

At December 31, 2006, approximately $18.6 million remained in the 2003 authorization to repurchase outstanding shares. No shares were repurchased in 2004, 2005 and 2006.

Dividend Reinvestment Program

On August 24, 2005, the Company announced the introduction of a Dividend Reinvestment and Direct Stock Purchase Plan for shareholders of the Company’s common stock. The Plan enables current stockholders to automatically utilize the cash dividends paid on their common stock holdings to purchase additional shares of Pacific Capital Bancorp common stock. Shareholders can register to participate in the Plan by going to the Investor Relations section of the Company’s website. As of December 31, 2006, there were approximately 185 shareholders actively participating in the Plan.

In December 2006, the Board of Directors authorized the issuance of $50.0 million of common stock through the plan.

Future Sources and Uses of Capital and Expected Ratios

Over the last five years, the Company’s assets have been increasing at a compound annual growth rate of 13.6%. To maintain its capital ratios, the Company must continue to increase capital at the same rate. Net income, the major source of capital growth for the Company, has been increasing at a compound annual growth rate of 11.0% over the same period of time, but this is reduced by dividends distributed to shareholders. The Company’s dividend payout ratio over the last three years has been 43.8% for 2006, 36.4% for 2005, and 35.9% for 2004. Though offset by some share repurchases, the retained earnings have resulted in capital increasing at a compound annual growth rate of 13.6%.

There are three primary considerations Management must keep in mind in managing capital levels and ratios. The first is 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 picks up in an improving economy, raising additional capital may be necessary. Management investigates the issuance of alternate forms of capital securities as well as common stock 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. In 2006, the increase to capital from the exercise of options (net of shares surrendered as payment for exercises and taxes) was $4.5 million or 6.2% of the net growth in shareholders’ equity in the year. At December 31, 2006, there were approximately $1.1 million options outstanding and exercisable at less than the then-current market price of $33.58, with an average exercise price of $21.49. This represents a potential addition to capital of $23.0 million, if all options were exercised with cash. In addition, except for those options expiring in 2007, the options are likely to be exercised over a number of years.

Aside from amounts authorized for share repurchases, there are no material commitments for capital expenditures or “off-balance sheet” financing arrangements as of the end of 2006. There is no specified period during which the share repurchases must be completed.

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

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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 amount of RAL loans. Management estimates that, were it to do a formal computation, on certain days during those weeks it and PCBNA may be classified as adequately capitalized, rather than well-capitalized. The Company has discussed this with its regulators and creditors.

In Note 11, Securitizations and Servicing of Financial Assets in our Financial Assets is a description of the securitization that the Company utilizes as one of its sources for funding RALs. This 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 sales reduce the impact on the capital ratios for the Company.