Looking Closer at the News from PCBC

Just listening to Tuesday’s investor call with Pacific Capital Bancorp‘s (PCBC), following on their quarterly filing.

• Bad loan to deposit ratio is 97 percent
• $200 million in new brokered deposits.
• tier one – below 9 percent
• total risk-based capital ratio is below regulator requirements
• $8.9 million impairment on investments on lihtc projects, or sometimes referred to as CRA investments. $2.7 million in fdic insurance.
• net interest margin drops 60 basis points.  Invested in low-yielding assets in order to get liquidity, according to CFO Stephen Masterson.  Pacific Capital CEO George Leis says that liquidity is good, but of course, it is thwarting net interest margin.

The good

• deposits increase by $279 million, non-interest bearing by $85 million…incentive programs
• $1 million in income for quarter
• $122 million in new loans.

Analysts didn’t seem to buy much of their argument.

Julianna Balicka , analyst, KBW: Can you help us understand the reserve?  I mean, it is at 5 percent of loans, and I hought that you guys tended to charge off more agrressively, that reserves would be more related to say qualitative and quantitative factors?

Stephen Masterson, CFO, PCBC:  I think the reserve build that you saw in the 3rd quarter was really as a result of some increases in qualitative factors, typically around commercial real estate.  I think we are looking at a $10 or $11 million build in the 3rd quarter.  That qualitative factor probably went up to about $20 million.  The quantitative factors are driven by historical loss rates.  Last quarter, we went to a shorter time frame – to calculate the last 5 quarters – to pick up the current economic climate – and that is the majority of the reserve right now.  The third element is specific reserves.  I think that they stayed relatively constant, maybe increasing by $2 to $4 million.

Julianna Balicka: Did you talk about your thoughts for the RAL business going forward, given your memorandum of understanding (MOU)  capital requirements.  If your balance sheet grows, as it normally does with the RAL business, then you will be further south of the MOU requirements.

Stephen Masterson, PCBC:  That is a big question, let me kind of disect it a bit.  As far as our RAL program, looking into next year. There are still a lot of moving parts…  We are still looking at the scale for next year’s program, and we are still looking at the funding for next year’s program, both on balance sheet and off balance sheet.  There area a lot variables to be worked out, and we will report on those when we have more details on them.

You asked the question about the IMCR (individual minimum capital requirement), and how that correlates with our RAL program.  That is certainly something that we are looking at.  However, we remain in contact and constant discussion with our examiners, in regards to that IMCR, and what we are doing in regards to our RAL program, and what we are doing in regards to our entire balance sheet, but that is about as much of what I can say to that, because we don’t disclose what we talk about with our examiners.

Julianna Balicka:  I think that was the general thrust of how I should think of that implication, and I think that you pretty much answered it.  The next day, she lowered her estimate of PCBC’s future price.

The market seems to have picked up on the message, as well.  Today the stock is at 65 cents per share.  That’s represents a 43 percent drop in market capitalization in a little more than one week.