DBRS Comments on the Q4 2008 Earnings of Pacific Capital Bancorp – Senior at BBB (high)

DBRS has today commented on the Q4 2008 earnings of Pacific Capital Bancorp (PCBC or the Company). DBRS rates PCBC’s Issuer & Senior Debt at BBB (high) with a Negative trend. PCBC reported a net loss of $41.8 million for the quarter, up from a $47.5 million net loss in the previous quarter, but down from net income of $12.2 million in Q4 2007. Excluding a $22.1 million goodwill impairment charge from Q3 2008 results, the weaker sequential quarter results were hurt by incremental loan loss provisioning costs of $4.9 million, lower net interest income from significant net interest margin (NIM) contraction and higher expenses.

While the higher credit costs exceeded DBRS expectations, the Company was basically break-even for the year (excluding the goodwill charge) as a result of a greatly improved Refund Anticipation Loan (RAL) and Refund Transfer (RT) performance. In 2008, the RAL and RT businesses produced $109.3 million in pre-tax earnings, which provided PCBC with much-needed capital to help work through asset quality issues. The RAL and RT season is underway now and DBRS notes that the Company must deliver another successful season in order to provide capital to absorb further potential credit losses. If asset quality continues to significantly deteriorate and/or the RAL and RT businesses deliver weaker than anticipated results, the ratings would likely be downgraded.

Over the past year, non-performing loans (NPLs) have more than tripled to $241.5 million, primarily as a result of residential construction loans. Specifically, NPLs stood at a high 4.07% of loans held for investment in the fourth quarter, compared with 2.91% in the previous quarter and 1.37% in Q4 2007. Meanwhile, net charge-offs (NCOs) have been elevated as well. During the quarter, PCBC charged off $50.9 million, or an annualized 3.50% of average loans at the Core Bank. This compares with 1.25% in the past quarter and just 0.10% a year ago. More than 70% of all NPLs are related to the Company’s problematic residential construction portfolio, which totaled approximately $250 million at quarter end. DBRS notes that loan loss provisioning significantly exceeded NCOs in 2008, resulting in a reserve build of $96 million. This boosted the loan loss reserve to 2.44% of total loans compared with 0.84% a year ago. DBRS expects further asset quality issues to continue to pressure earnings at the Core Bank.

Also contributing to the incremental quarterly loss was NIM compression of 70 basis points to 2.87% during the quarter. Loans transitioning to non-accrual status, asset yields dropping considerably from the Fed rate reductions and funding costs that actually increased drove the decline. DBRS notes that part of the increase in funding costs relates to the large amount of brokered certificates of deposits (CDs) PCBC has brought onto the balance sheet to fund the RAL program. Overall, net interest income declined 12% to $54.1 million.

In light of the $180.6 million preferred shares investment by the U.S. Treasury, DBRS notes that holding company liquidity and regulatory capital ratios have been enhanced. The investment also provides an additional capital cushion to absorb future credit costs and to continue to lend. Additionally, PCBC cut its dividend in half to further protect capital in the difficult environment.

Pacific Capital Bancorp, a financial holding company headquartered in Santa Barbara, CA, reported total assets of $9.6 billion at December 31, 2008.

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

The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.