DBRS Downgrades Pacific Capital Bancorp to CCC; Ratings Still Under Review with Neg. Implications

DBRS has today downgraded all ratings of Pacific Capital Bancorp (PCBC or the Company) and its bank subsidiary, Pacific Capital Bank, N.A. (the Bank), including PCBC’s Issuer & Senior Debt rating to CCC from B and the Bank’s Deposits & Senior Debt rating to B from BB. Concurrently, the Bank’s Short-Term Instruments rating was downgraded to R-5 from R-4. All ratings remain Under Review with Negative Implications.

The ratings action follows the Company’s pending sale of its E-Filing Financial Services Division, which houses the Refund Anticipation Loan (RAL) and Refund Transfer (RT) businesses after the Office of the Comptroller of the Currency (OCC) notified Pacific Capital that it would not allow any RAL originations in 2010. As part of its Under Review with Negative Implications, DBRS was looking for the RAL/RT business to operate at or near capacity for the 2010 tax season to generate much needed capital to offset large credit losses. While the sales price is not known at this time, distressed sales rarely receive fair value and the Company is now losing its primary capital generator at a time Pacific Capital needs it most.

Another concern, the Company’s Chief Financial and Operating Officer is departing at a time when all strategic options should be on the table and continually evaluated. In DBRS’s opinion, the Company must raise capital and shrink the balance sheet to survive independently.

DBRS notes that Pacific Capital is holding excess liquidity and is mainly concerned with low capital metrics combined with elevated asset quality problems. Indeed, the tangible common to tangible assets ratio was a very weak 2.74% at the end of Q3 2009 and more quarterly losses are likely as the Company deals with high levels of nonperforming assets. Furthermore, while the Company is well-capitalized by the standard regulatory definition, capital metrics are below the enhanced capital requirements mandated by the OCC.

The review will focus on what strategic plans management will undertake to position the Company for improved financial fundamentals, how much capital the sale of the RAL/RT business will generate, 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. In DBRS’s opinion, Pacific Capital must immediately address its weak tangible common equity ratio, especially since more quarterly losses are likely.

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.