DBRS Comments on Pacific Capital’s 1Q10 Results- Sr. Debt at CC Unaffected; Under Rev. Neg.

DBRS has today commented on the 1Q10 results of Pacific Capital Bancorp (PCBC or the Company). PCBC’s ratings, including its Issuer & Senior Debt rating of “CC” were unaffected by 1Q10 results. All ratings are Under Review with Negative Implications. The commentary followed PCBC’s announcement of 1Q10 results, and its disclosure that it was entering into a definitive agreement with SB Acquisition Company LLC, a wholly owned subsidiary of Ford Financial Fund, L.P. (Ford), where Ford has agreed to invest roughly $500 million in the Company.

DBRS comments that the Ford investment, if it closes, will significantly augment PCBC’s loss absorption capacity. However, DBRS notes that the investment is based upon several closing conditions, which creates a component of uncertainty and could take some time to complete. DBRS comments that if PCBC’s capital position is not materially strengthened over the near term, rating actions will likely occur and that the rating differential between senior debt and subordinated debt will significantly widen.

Under the agreement, PCBC agreed to sell, to Ford, at the closing of the investment 225,000,000 shares of its common stock at a purchase price of $0.20 per share ($45 million) and 455,000 of newly created mandatorily convertible participating preferred stock (preferred stock) at a price of $1,000 per share ($455 million). As part of the definitive agreement, PCBC will commence a rights offering following the closing of the Ford investment, to provide shareholders of record as of the close of business on the day prior to the closing date (Legacy Shareholders) the non-transferrable right to purchase common stock directly from the Company at a price of $0.20 per share. A maximum 20% of the pro-forma fully diluted equity will be available for purchase by Legacy Shareholders in the rights offering, proportionally to each Legacy Shareholder’s ownership in the Company.

The investment is subject to satisfaction or waiver of certain closing conditions, including: completion of a recapitalization transaction with the U.S. Treasury (Treasury) involving the exchange of all shares of preferred stock issued by the Company under TARP, having a liquidated preference of $180.6 million and associated warrants for shares of the common stock in an amount equal to 20% of that liquidation preference and the amount of accrued but unpaid dividends of the preferred shares, with the common stock valued at $.20 per share; completion of tender offers for at least 70% of the Company’s $67.3 million of trust preferred securities, at a purchase price equal to 20% of such liquidation amount and the Bank’s $121 million aggregate principal amount of subordinated debt instruments, at a purchase price equal to 30% of such principal amount. Completion of the foregoing transactions and of the Ford investment would be conditioned upon each other. Certain regulatory and governmental approvals and the Company’s receipt of approval from the NASDAQ Stock Market to issue the securities described above in reliance on the shareholder approval exemption set forth in NASDAQ Rule 5635(f).

After the close of the transaction (without giving effect to the contemplated rights offering), Ford would own approximately 91% of the Company’s common stock, the Treasury would own approximately 7% and the Company’s shareholders, as of today, would own approximately 2% of the common stock.

In light of severe macroeconomic headwinds, PCBC reported a net loss applicable to common shareholders of $80 million for the quarter, decreasing from a loss of $20 million for the prior quarter. On a linked-quarter basis, the 1Q10 loss reflected a 1.7 times increase in provisions for loan loss reserves and a 23% decline in noninterest income. The decline in noninterest income reflected higher 4Q09 securities related gains and service charges and fees. Net interest income contracted 8% during the quarter, driven by 7% decrease in interest earning assets, as the Company continues to reduce its loan balances. Net interest margin remained flat at 2.6%. Reflecting the Company’s expense reduction initiatives, noninterest expenses contracted 16%, during 1Q10.

Asset quality continues to be a significant challenge for the Company. Non-performing loans (NPLs) remain very high (8.5% of total loans), yet the pace of NPL growth somewhat declined during the quarter. Net charge-offs (NCOs) represented a very high 6.6% of average loans. DBRS notes that delinquencies have yet to stabilize pointing to continued asset quality problems. Consistent with prior quarters, commercial loans, especially construction exposures, represented the bulk of NPLs. DBRS comments that PCBC’s loan loss reserves remained moderate at 68% of nonperforming loans.

Capital remains severely strained. At March 31, 2010, the Bank’s Tier 1 leverage, and Tier 1 and Total risk based capital ratios were 4.6%, 7.5% and 10.2%. As such, the bank was not in compliance with the minimum capital ratios set by the OCC and its Tier 1 leverage was below regulatory defined “well capitalized” levels.

Note:
All figures are in U.S. Dollars unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.