Too Much Clubbiness at Pacific Capital

Pacific Capital Bank, (PCBC) in spite of huge losses and a declining base of regulatory capital, continues to extend loads of credit to one favored group – its own executives.

In the most recent filing with the FFIEC (June 30th, 2009) PCBC reported that it had extended $39.03 million in loans to its executives.  That is roughly 8.2 percent of  tier one capital ($476.3 million).

Now, it is worth mentioning that these kinds of loans are legal.  I could not find a bank that didn’t have such loans on its books.  My point here is to say that this is probably not appropriate at this scale for PCBC, nor is it wise at a time when the bank is struggling to maintain its equity ratios.

Too friendly for their own good

Is $39 million a lot?  Well, by comparison to other banks, it is absolutely stratospheric.  It exceeds the rates at just about all of the banks that I checked out on a quick survey.  At Wells, the share amounts to 0.05 percent.  PNC – 0.14 percent, Key – 3.4%, Bank of America – 0.007 percent, BB&T – 4.58 percent. Back to Wells – not only does that ratio amount to 152 times greater at PCBC than at WFC, but the outstanding loans to executives at the small PCBC are larger than those to executives at behemoth Wells in absolute sums.  Wells has just $20.2 million out to its executives.  PNC has just $14 million.  Bank of America NA has just $6.6 million.

Pacific Capital makes a lot of refund anticipation loans.  So, I checked out some of their competitors in that business.  Again, they were way “ahead.” At JP Morgan Chase, the figure was 1.40 percent.  At Republic Bank (KY) – 2.99 percent.  At River City, 4.31 percent.

Readers of Bank Talk will recognize that this is a familiar refrain.  (But hey – at least it is a new note!) I have written about PCBC’s challenges in regards to its safety and soundness here.  I went over their last earnings report here.  It wasn’t pretty. I have questioned the wisdom of their tax refund business.  I have discussed their capital infusion from TARP, and their inability to make their dividend payments on that infusion.  Pacific Capital has dodged the connection between its RAL lending and its TARP money, but its hard to see how that is not a ruse.

Most of these banks are unlike Pacific Capital in that they are currently working at regulatory capital ratios that meet the standards of regulators.  There’s no worry that the FDIC is going to seize the deposits of Chase, Bank of America, or BB&T.

Now, one good thing about loaning to your own staff is that your chances of getting paid back are probably pretty good.  Most of these executives, for example, are required to buy shares of stock in PCBC.  The fact that PCBC is lending them the money to buy those shares, well, that’s a judgment of another order.  That said, it makes common sense that these loans are not bringing in high rates of return.  It stands a chance that they are full of special terms (deferred interest payments, for example) that reduce their returns to below minimal market rates of return.

According to regulations promulgated by the Federal Reserve (section 23A and 23B of Regulation w), an institution cannot lend out more than 20 percent of its capital and surplus (Tier One plus Tier Two) to executive officers.

PCBC is probably pretty safe, then, at this point.   By this calculation, their extended credit is 6.07 percent.  So, they are not in regulatory danger for this criterion.  Then again, they are still far higher than other banks. The specific outcome calculated by Regulation W is 171 times greater at PCBC than the comparable figure at Wells, and 926 times greater than at Bank of America.

Is this a problem?

So if PCBC isn’t in danger of prompting a federal intervention for its in-house draws for its executives, is there a problem?

I would say so.  PCBC is deferring interest payments on outstanding debts.  PCBC is deferring payments on its TARP obligations.

What else could PCBC do with that $37 million? Let’s recognize that this is a moot point, because some of those loans have as long as 28 years remaining on their terms.  That said, all of that money would do something to shore up those worrisome capital ratios that do matter.  PCBC’s tier one capital ratio is below 6 percent, at a point in time when the FDIC wants it upped to 9 percent by the end of September. That is the most important point – that a laxness about its own funds now leave the directors of PCBC in a tight fix where they cannot draw on money that would help to keep their institution afloat.

It seems that lending to executives, directors, shareholders, and other insiders might be a function of a bank’s ownership. Family-owned banks might be very generous with their own dollars, relative to banks that are largely funded by equity on open exchanges. Still, Pacific Capital is not one of those banks.  It is beholden to its shareholders.

About the data

This data comes from FFIEC.  It references Schedule RC-R (for tier one and tier two capital amounts) and Schedule RC-M (for credit extended to executives.)