Santa Barbara-based Pacific Capital Bancorp will get $10 million for a program that earned the banking firm hundreds of millions of dollars over the past decade, a sum that will contribute only “a drop in the bucket” toward curing the bank’s capital woes, one analyst said. The stunningly low price makes the possibility of a sale of the bank “more acute,” the analyst said.
Pacific Capital, the parent of Santa Barbara Bank & Trust and several other Central Coast banking brands, said Jan. 14 that it had sold its refund anticipation loan program to a newly created company made up of the program’s management and investment-firm backers. On Christmas Eve day, Pacific Capital disclosed that regulators barred it from making refund anticipation loans, forcing the sale of the controversial program that provided fast cash for expected tax returns, often to low-income taxpayers.
Since 2000, Pacific Capital has earned about $303 million from the refund loan programs after taxes, said Julianna Balicka, an analyst with Keefe, Bruyette & Woods. Without it, the bank would have been at a net loss for the past decade, when it made an overall after-tax profit of only $205 million, Balicka said.
The sale of the cash-generating program does little to shore up the bank’s capital levels, which have drawn the scrutiny of federal regulators. Though still “well-capitalized” under the letter of the law, the bank has failed to meet the higher capital levels it agreed to with regulators.
“This makes the sale [of the rest of Pacific Capital] a lot more acute because they really didn’t alleviate their capital needs,” Balicka said. “$10 million is a drop in the bucket.”
The big question for Pacific Capital was whether the prospective buyer of its refund loan program could find a partner bank to fund the program. The refund loan system was worth far less to a buyer without a partner bank to originate the loans, analysts said.
“This low price suggests to me that they couldn’t get another bank on board in time for tax season,” Balicka said.
Pacific Capital’s shares closed at $1.25 on Jan. 14, up 9.65 percent over the day prior. The company has seen its share price tank from a 52-week high of more than $15.
The bank also said Jan. 14 that it would end its deferred compensation plans for its top executives. Those programs allowed the executives to be given part of their pay at a later date to avoid some taxes while saving for retirement.
But at least two top-level executives will be getting lump sums right now instead. Clay Larson, vice chairman of the board of directors, will get $818,588 in cash and stock, and Frederick Clough, the company’s executive vice president and general counsel, will get $24,465 in cash and stock.
[Editor’s note: The previous story from earlier on Jan. 14 is below]:
PCBC shares soar on speculation of deal
Shares of Santa Barbara-based Pacific Capital Bancorp climbed to their highest price in months and traded on heavy volume midday Jan. 14, suggesting big news about the company’s refund anticipation loan program is on the horizon.
Pacific Capital, the parent of Santa Barbara Bank & Trust and several other Central Coast banking brands, said Dec. 24 that regulators had barred it from making refund anticipation loans, forcing the sale of the controversial program that provides fast cash for expected tax returns, often to low-income taxpayers. The bank said it was courting a private equity fund to buy the program, which has provided the majority of Pacific Capital’s profits in years past.
By midday Jan. 14, more than 4 million shares had traded hands, rising to $1.33 a share, the highest peak since November. The last day with such heavy volume was Dec. 18, when 7 million shares traded hands days before the announcement that the refund anticipation loan program would be sold.
“Given that the [refund anticipation loan] tax season is about to begin, I’d imagine [Pacific Capital] is getting close to announcing a resolution of their [refund anticipation loan] sales,” said Julianna Balicka, an analyst with Keefe, Bruyette & Woods. “That could be driving a lot of trading today.”
The big question for Pacific Capital was whether its prospective buyer could find a partner bank to fund the program. Analysts say the program is worth far less to a buyer without a partner bank to originate the loans. If the private equity buyer found a partner bank, Pacific Capital would get higher price for the program, analysts said.
But the rising stock price does not necessarily indicate that a hefty purchase price for the refund anticipation loan business is near, Balicka said. The last heavy trading volume day — Dec. 18 — was just before the announcement that the profitable refund loan program would be sold off.
“I wouldn’t necessarily read good news into this price increase, but I would read into it that there’s news,” Balicka said.
The sale of the refund loan program comes as Pacific Capital is examining ways to clamp down on operating expenses. Debbie Whiteley, executive vice president of investor relations and corporate communications at Pacific Capital, said employee retirement plans have come up for reconsideration.
Whiteley said Pacific Capital has changed its benefit plan to pay 50 percent of the costs for eligible retirees and their spouses until those people become eligible for Medicare. After that the subsidy will cease, Whiteley said.
The cuts come as retirees and other owners of Pacific Capital’s stock are reeling. The stock has traded around the $1 mark for months, down from highs of more than $20 a share as recently as a year and a half ago. Dividend payments have also been stopped, a move the bank was forced to make when it suspended payments on the $181 million in federal bailout money the bank received.
Whiteley said the affected retirees received a FedEx package with documents about the changes — “this was the only way to ensure that they received all of the materials on the changes,” Whiteley wrote in an e-mail — and that the bank has set up a hotline to handle questions.
“Given the current operating environment, we have been in the process of evaluating all of our operations expenses to identify areas where costs may be out of alignment with prudent management of the company,” Whiteley wrote in an e-mail statement. “Our evaluation of our benefits plans clearly identified that [Pacific Capital’s] practices with regards to health plan coverage for retirees have historically been substantially generous and above the industry norm.”
[Editor’s note: This story has been updated to reflect that Pacific Capital began examining its operating expenses before the sale of its refund anticipation loan program.]