Pacific Capital Tanks

Pacific Capital Bancorp (PCBC) is on the ropes.  With it rides some of the legitimacy of the TARP program. Recently, there has been news of some successful exits by large banks from TARP.  What we haven’t heard is the story of bank that can’t survive, in spite of help from TARP.  Pacific Capital might be that bank.

Pacific Capital, the parent of Santa Barbara Bank & Trust, received $180.6 million in TARP funding last fall.  While the Treasury seems willing to stand by and watch scores of banks fail, it found something worth redeeming in PCBC.

That’s hard to understand, since PCBC makes most of its money off of refund anticipation loans.  These are dubious products that extract high fees from low-income workers who apply for a short-term advance on their tax refunds.  The Treasury should disdain this kind of activity, since most of the dollars for RALs come from refunds based upon another federal anti-poverty program.  That program, the Earned Income Tax Credit, can put refunds of more than $2000 in the pockets of working families.  That makes it an attractive line of business for any banker that wants to ride the backs of the poor.

Incidentlally, there aren’t many poor people in Pacific Capital’s local area.  They are in Santa Barbara, California – possibly one of the wealthiest cities in the United States.

You would think that there would be a means to make a dollar in that kind of neighborhood, right?  Guess again.

Yesterday, PCBC announced its earnings for the first quarter.  The consensus estimate was that PCBC would report a modest loss – maybe 50 cents a share.  It wasn’t too long ago (q1) that Reuters was writing that PCBC would “return to profitability.” An analyst from Keefe, Bruyette, and Woods even went so far as to say that they would earn 44 cents per share.

Swing forward three months, and things are looking pretty dark.  PCBC reported losses of $4.46 per share.  That excludes some one-time write downs, which, if included, extend the losses to a staggering $7.77 per share.

This presents a thorny problem for regulators.  While Treasury wants to believe that TARP will save banks – and PCBC is testing that faith by deciding to put off paying its TARP dividends – the FDIC is unlikely to ignore this problem for long.

PCBC’s tier one capital ratio plummeted to just 5.67 percent this quarter.  That is well below the minimum that the FDIC likes to see.  They would prefer it to be above 8.5 percent, and in the fall they are going to raise that to 9.0 percent.

Right now, PCBC has about $440 million in equity, but $348 million in non-performing loans.

I can’t believe this – they have an efficiency ratio of 284 percent!

They aren’t paying their creditors.  They suspended their dividend to common and preferred shareholders.  Dunn and Bradstreet just lowered the ratings on their debt, and put a negative outlook going forward.