By Pacific Coast Business Times Staff Friday, June 26th, 2009

Pacific Capital Bancorp took a big one-day hit to its stock price June 23 after national media outlets sniped at it with reports that it has put on hold some payments on federal money it received last year.

The Santa Barbara company — parent of Santa Barbara Bank & Trust and other banking brands on the Central Coast — said June 22 that it is suspending dividend payments to stockholders and interest payments on $69.4 million in debt.

The big question for Pacific Capital is whether the action signals that the company is hard-pressed to raise money to meet a June 30 federal deadline to boost its capital ratios.

Analysts disagree on the question. Some believe the dividend halt means Pacific Capital will pay a heavy price to gather up more cash, while others argue the move means the banking company won’t have to raise capital at all and might be able to top off its capital ratios by selling a few assets.

George Leis, president and chief executive of the banking company, told the Business Times on June 26 that regardless of the bank’s capital ratios June 30, it will be “business as usual” July 1. There’s no event tied to the bank’s agreement with federal regulators, Leis said.

“Our bank is well-capitalized and has ample liquidity,” Leis said in an interview at Pacific Capital’s headquarters. “We’re the same bank that’s been around since 1960. We’re the same bank that’s been so involved in the community. [Federal regulators] may ask us to do additional things internally, but those additional internal things will have no effect on the day-to-day needs of our customers.”

The federal government’s non-voting preferred stock, which it got in exchange for the $180 million it injected into Pacific Capital last year, was among the shares whose dividends the bank froze June 22. The Wall Street Journal cited similar moves by two other banks the same day and asserted that the dividend halts were “a sign of the deepening misery for large swaths of the U.S. banking industry.”

The next day, after cable news outlets parroted the Journal’s assessment, Pacific Capital’s stock dropped 20 percent to $2.60, hitting a 17-year low in intraday trading and down more than 75 percent from a year ago. Analysts at Moody’s and DBRS cut the firm’s issuer rating to junk grade.

Debbie Whiteley, executive vice president of investor relations and corporate communications at Pacific Capital, told the Business Times that the banking company has been telling staff and clients it has taken prudent steps to preserve its capital. Contrary to reports in the Journal, it is not “cash-strapped,” she said.

She said the company has found dips in its stock price disappointing and that it believes downgrades by rating agencies were “overly harsh.”

“We are not cash-strapped; we have ample cash to fund operations,” Whiteley said. The actions “have no impact on our clients or ability to serve their needs,” she added.

Whiteley said the moves to suspend the dividend on common stock and defer payments on federal money were “a tough thing to do because we know many of our local shareholders depend on those dividends.” But she said it was “the prudent thing to do” because it’s expected to save the bank $8 million each quarter. The bank can go up to 20 quarters without making interest payments without facing a penalty.

“These steps were in the long-term best interest of our company,” Whiteley said. “It was the right thing to do.”

In April, Pacific Capital entered a deal with federal officials to boost its capital ratios by June 30 — something it could do by cutting costs, selling assets or by raising money from investors.

Leis, the CEO, said the banking company is considering all options within its control to boost its capital ratios, including selling loans.

“All of the things we’re doing are aimed at preserving capital,” Leis said, adding that the results of the bank’s efforts won’t become clear until its next earnings report in late July.

“I don’t know what the ratio will be [on June 30], but for a bank with our level of capital and our level of liquidity, it’s going to be business as usual” on July 1, Leis said.

The Office of the Comptroller of the Currency and Pacific Capital agreed that the bank must boost its tier-one leverage ratio — basically, the bank’s capital divided by its loans — to 8.5 percent by June 30 and 9 percent by September 30.

As of March 31, the bank’s tier-one leverage ratio was 6.8 percent. Analysts don’t seem to agree on whether the bank’s dividend halt signals that it expects trouble in raising capital or that it’s saving cash and preparing to sell assets in an effort to not have to raise money from investors at all.

Keefe, Bruyette & Woods analyst Julianna Balicka warned clients in a June 23 note that the bank’s moves make a capital raise “potentially more pressing,” according to DowJones Newswires.

But Sandler O’Neill analyst Aaron James Deer told the news service he thinks the bank’s capital position is strong and that it might not have to raise more cash. “The suspension of the dividend payments has more to do with maybe the fact that they’ve been more aggressive with rebuilding their provisions,” Deer told DowJones. “[Pacific Capital] has a tremendous amount of excess funding on the balance sheet that they can pay down or run off.”

The most recent cash-saving move comes a few months after Pacific Capital announced it would cut 22 percent of its staff, or about 300 jobs, by July 1.

In late May, The Santa Ynez Band of Chumash Indians, which owns more than 5 percent of Pacific Capital, sent a letter to the bank expressing dismay that its board nominations didn’t receive seats. The band’s letter voiced its concerns about the level of expertise among the banking company’s directors, executive compensation and a lack of diversity on the board of directors.

“We are always interested in the views of our shareholders, and the board of directors will take their comments under consideration,” Whiteley told the Business Times in an earlier interview in response to the letter.

-Staff Writer Sara Hamilton and Editor Henry Dubroff contributed to this report.

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