DBRS Comments on Pacific Capital Bancorp’s 2Q12 Results - Senior at B (high)

DBRS, Inc. (DBRS) has today commented on the 2Q12 earnings of Pacific Capital Bancorp (PCBC or the Company). DBRS rates the Company’s Issuer & Senior Debt at B (high). All ratings were placed Under Review with Positive Implications on March 12, 2012 following the Company’s announcement that it agreed to be acquired by UnionBanCal Corporation (UnionBanCal or UB). The acquisition is still expected to close during 4Q12.

The Company reported net income of $24.1 million, up from $16.6 million in the first quarter, and from $21.0 million in 2Q11. DBRS notes that 2Q12 earnings were the Company’s highest since the Ford investment.

Highlights of the quarter include the termination of the Written Agreement with the Federal Reserve, margin expansion, improved noninterest income, and strong originated or purchased loan growth. While Pacific Capital is still under an Operating Agreement with the Office of the Comptroller of the Currency, DBRS views the termination of the Written Agreement very positively, as it recognizes the significant strides the Company has made since the Ford Investment, in terms of performance as well as improving internal controls and procedures. Overall, Pacific Capital reported considerable positive operating leverage.

During the quarter, the net interest margin increased a significant 26 basis points to 4.55% reflecting better than previously expected performance of the purchased credit impaired loan portfolios. As a result, net interest income increased $3.5 million, or 6%, to $61.2 million.

While total period-end loans were down modestly sequentially, loans originated or purchased since the Ford Investment grew a strong $155 million, or 19%, to $966.1 million. Meanwhile, deposits were relatively stable at $4.6 billion.

Noninterest income increased $1.7 million, or 12%, to $15.6 million reflecting primarily higher gain on sale of other real estate owned and loans. Additionally, trust and investment advisory fees improved 7% to $5.7 million.

Adjusting for non-core items, noninterest expenses increased 2% to $50.9 million. Non-core expenses included $1.4 million of merger related costs compared to $1.0 million of merger related costs and $2.2 million of expenses related to an increase in the estimated earnout liability related to the Company’s registered advisor subsidiaries in 1Q12.

Improved earnings allowed the Company to continue to build on already strong capital metrics. Specifically, Pacific Capital’s tier 1 leverage ratio was 13.3%, while its tangible common equity ratio was 12.58%.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents, the Federal Reserve, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Driscoll
Approver: Roger Lister
Initial Rating Date: 24 October 2005
Most Recent Rating Update: 12 March 2012

For additional information on this rating, please refer to the linking document under Related Research.