Pacific Capital’s share price soared on Friday, creating a pattern that should provoke some questions.

Pacific Capital, a small bank headquartered in Santa Barbara, California, jumped 48 percent on Friday, from 87 cents per share to $1.29. It was the largest jump since November 23, when share prices finished at $1.25.  That wrapped up a dramatic week, when share prices increase 86.5 percent over four days.  That has turned out to be fleeting gain.  This morning, Pacific Capital’s shares dropped 28 percent in the first 19 minutes of trading.

Both weeks have one thing in common – the expiration date for equity.  This is a link to the calendar of options expirations in 2009.  This link provides a good explanation of how options work.  Equity options end after the third week of the month.  Traders close out positions over the weekend, meaning that option positions are either in or out of the money at Friday’s close.

Here is one scenario of how a trader might make money on options for his or her financial institution.  An options trader could sell puts or buy calls.  Buyers of puts would expect that share price to drop.  These instruments hold two kinds of value – intrinsic and time.  The intrinsic value is the difference in the contract price (i.e. $2.50) and the current market price.  The time value is based on an estimate of the expected value of the remaining time.

A holder of a $2.50 put in PCBC was sitting pretty last week -  each put would have been worth about $1.75 on Thursday when the shares were at 86 cents with one day to go.  That value evaporated on Friday, though, as puts ultimately exchanged at $1.08.  The same kind of change could happen on the call side.

Traders could make money two ways in that scenario.  For one, he or she would make a transactional profit on selling puts or calls.  Demand for puts and calls increases with volatility.  Second, there would be money to be made on the change in value of options.  Those $2.50 puts, for instance, sold at $1.50 or more for much of the month.

It takes some wealth for one institution to change the price of a stock.  That said, it is much easier with a small company.  If the hypothetical trader was working for an institution with substantial wealth, it would be possible.  That options trader could work with the equity traders.  The buyer would have to keep on buying, but the “buy” would be relatively little.  The 7.6 million shares transacted in PCBC on Friday probably cost less than $10 million overall.  The ability to change the price in equity is not something that most investor have, but it is well within the reach of corporate or institutional investors.

The buying institution would take some risk, of course, that they would be buying shares at an elevated price.  The only escape, of course, would be to dump the newly acquired shares while the price was still high.  That is exactly what is happening this morning. The shares have given away almost half their gains, on a volume that has exceeded PCBC’s daily average volume before noon.

I cannot track this next bit of information, but traders were reporting that a single block trade of 2.1 million shares went in just before close of trading on Friday.  As well, three trades accounted for 35 percent of all volume in PCBC.

Why this Matters

There are several reasons why these fluctuations matter, and those reasons reach into the interests of several different parties.  First and foremost, Pacific Capital is a victim in this scenario.  Their share price matters as they struggle to raise regulatory capital.

Pacific Capital’s deposits are also at risk.  The fluctuation in equity price influences regulatory capital. Pacific Capital is already undercapitalized. With manipulation, that basis is vulnerable.  If the equity is threatened, it enhances the prospect that the bank will be taken over.  While the holders of guaranteed deposits would be made whole by the FDIC, it is taxpayers that are ultimately on the hook for that outcome.  The fancy of traders is our loss.

These are dramatic swings for a small company such as  Pacific Capital.  It has about $52 million in market capitalization.  In this arena, a large trader (s) could easily use market size to influence short-term prices.  That is what could be happening.  On Friday, about 7.6 million PCBC shares were traded.  That is a very high volume.  (more…)

The departure of a senior C-level official at Pacific Capital prompts speculation that the bank is on the verge of a shake-up.  Stephen Masterson, who serves as both Chief Financial Officer and Chief Operating Officer, announced on Friday last week that he will resign, effective March 12, 2010.

Masterson’s replacement was not named.

Pacific Capital has been the subject of some internet rumors that suggest it might be acquired by a number of West Coast banks. Pacific Capital has some valuable branches and a long-standing role in its local communties. In that scenario, Pacific Capital’s shareholders would see some value for their existing shares.

Another possibility is that the FDIC might seize the assets of PCBC. Shareholders would be out of luck.  Indeed, (more…)

Yesterday’s earnings report at Pacific Capital was, at best, a mixed bag.  Pacific Capital lost 87 cents per share.  They were expected to lose 80 cents per share, but then again, last quarter they lost $7.77 per share, so maybe it is a vast improvement.

CEO George Leis was optimistic about their quarter.

“The aggressive approach we took earlier in 2009 towards resolving our problem loans helped drive a substantial decline in our credit costs, particularly in the construction and land portfolio, said Leis in a prepared release.  “While our credit costs still remain elevated above historical levels, we are encouraged by the moderation we experienced in the third quarter.”

Gee, that’s swell.  Lose $41 million, call it encouraging.

This earnings report should concern shareholders not just at Pacific Capital, but also franchise owners and shareholders at their RAL partners, Jackson Hewitt and Liberty Tax Service.

Unusual Accounting

The problem for PCBC is that they don’t have much more room for more losses.  Shareholder equity is now just $397 (more…)

A lot of people are wondering what is about to happen to Pacific Capital.  Since the beginning of the year, PCBC has slowly, but steadily, marched downhill.   The shares entered 2009 at $17.  Today, they closed at $1.44.

The future is not clear, though.  PCBC may be acquired by another bank.  The FDIC might intervene.  It is hard to know, although the decline in the share price suggests that investors are dubious about the bank’s prospects.  Analysts have talked about selling off the refund anticipation loan (RALs) business.  That is an interesting question – and something that I would like to consider today.

As bad as things are right now, it could get worse.  For one, PCBC may lose some of its ability to shelter (more…)

Pacific Capital Bank, the small California bank with big problems, has earned some national recognition this week. Granted, its not good recognition, but, well, what do you expect?

Two-time Pulitizer Prize winning reporters Jim Steele and Donald Bartlett (America: What Went Wrong) have contributed an analysis of the the TARP program for the October issue of Vanity Fair (linked).  They briefly draw on the short-sighted nature of the management of the TARP program, and then drill down to examine some of the curious follies exhibited by some of the recipients of the program.

The first bank profiled is none other than Pacific Capital. Bartlett and Steele pillory TARP’s lack of due diligence in (more…)