DBRS Comments on the Q3 2009 Earnings of Pacific Capital Bancorp – Senior at B

DBRS has today commented on the Q3 2009 earnings of Pacific Capital Bancorp (PCBC or the Company). DBRS rates PCBC’s Issuer & Senior Debt at B and all ratings are Under Review with Negative Implications. DBRS notes that failure to raise significant capital or to execute upon its strategic option(s) in Q4 2009 would likely lead to a multiple notch downgrade.

PCBC reported another sizeable net loss available to common shareholders of $40.7 million compared to net losses of $362.6 million in the second quarter and $47.5 million a year ago. Elevated loan loss provisioning needs, margin compression, an $8.9 million impairment related to Community Reinvestment Act investments and higher credit related costs drove the quarterly loss. Expense initiatives and improvements in some fee-based revenues brought income before provision and taxes (IBPT) to $1 million. While IBPT is finally positive again, it is hardly sufficient to allow PCBC to earn its way through its substantial asset quality issues.

Asset quality remains a significant challenge for the Company. Non-performing assets (NPAs) continue to increase and net charge-offs (NCOs) remain high. NPAs reached 7.16% of loans held for investment, up from 6.17% last quarter. While loan sales did hurt this metric, the absolute amount of NPAs increased as well driven by the commercial real estate and residential real estate portfolios. Meanwhile, NCOs declined to 2.50% of average loans (annualized) from 5.40% in the second quarter. Construction continues to account for the majority of NCOs. While the pace of decline in updated appraisals has slowed, the appraisals are still coming in lower, which could lead to additional future losses. Additionally, delinquencies have yet to stabilize pointing to continued asset quality problems.

During the quarter, the Company delivered solid deposit growth enhancing overall liquidity. Indeed, core Bank (excludes RAL-related deposits), increased almost $400 million, or 8.2%, during the quarter. However, the deposit growth was invested in low yielding, safe assets putting pressure on the net interest margin (NIM). Specifically, NIM declined 6 basis points during the quarter to 2.93%. With PCBC focused on maintaining strong liquidity levels, NIM is likely to remain under pressure and limit IBPT improvement. Despite over $200 million in loan sales, the increase in liquidity ballooned the balance sheet by approximately $600 million. The balance sheet growth combined with the net loss hurt already weak capital metrics. DBRS notes that while the Company is well-capitalized by the standard regulatory definition, capital metrics are below the enhanced capital requirements mandated by the OCC. Furthermore, tangible common equity to tangible assets is below 3% and needs to be bolstered immediately.

The review, which was initiated on July 31, 2009, is focused on what strategic plans management will undertake to position the Company for improved financial fundamentals, the ability of PCBC to operate its RAL/RT business at or near capacity, whether balance sheet initiatives will achieve the desired regulatory capital ratios mandated by the OCC and whether elevated credit costs will continue to invade capital and pressure overall results. With a weak tangible common equity ratio and more potential losses coming, DBRS notes that significant downside risk to the ratings remain if significant capital is not raised shortly.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, 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.