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Special Comment: Where the region's biggest bank goes from here

By   /   Thursday, April 29th, 2010  /   Comments Off on Special Comment: Where the region's biggest bank goes from here

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Best and worst of times, indeed.

Behind Pacific Capital Bancorp’s decision to sell a 90 percent stake to a Texas investment firm is a recognition that the California real estate market has not yet begun to turn around.

That is the nightmare the bank faced — a slow bleeding of capital, including a loss of nearly $80 million in the first quarter, that would put it at the very brink of failure.

But behind the deal also is the remarkable franchise built over 50 years by its founders and talented successors such as Don Anderson and Dave Spainhour. Despite nearly half a billion dollars in losses, it continues to have a valuable branch network, a solid wealth management unit and loyal customers, including some of the biggest names in Ventura County agriculture.

In a move that reflects skillful thinking and extremely complex negotiating, Pacific Capital is trying to solve a multitude of problems with one deal. It remains to be seen whether all of the parties agree, but here is how it shakes out for key players.

• The U.S. Treasury: A failure of Pacific Capital would have put the Treasury’s $180 million in TARP funds at risk and reduced its warrants to zero. Instead, the government will trade its debt for stock, get accrued dividends and exercise its warrants at 20 cents per share. It looks like the Treasury might make a profit on the deal.

• Current shareholders: They too, risked getting nothing if the FDIC took over. Instead they will get a much smaller stake in the recapitalized Pacific Capital. But shareholders with cash will get a chance to essentially double-down with their investment, buying more stock at 20 cents per share. If it works out, they will have an extremely low tax cost going forward.

• Management and brand: By not selling to a bigger institution, Santa Barbara Bank & Trust and other brands will get to live on and, given recently signed employment contracts, management will remain in place. What happens down the road is anybody’s guess. But at least for now, Pacific Capital will remain an independent, stand-alone institution.

• Ford Financial: In exchange for a very large amount of cash, the Gerald Ford-Carl Webb team gets back into the banking business at a very low stock price. Pacific Capital looks a lot like a retail bank, and retail banking is their specialty. Can they duplicate the success they had with Cal Fed? This looks like a classic case of buying in at the bottom — just as they did in 1994.

• The regional economy: Having strong independent banks in leadership positions was great for the Tri-Counties in the last economic cycle. Along with other recent capital raises at other banks, getting an additional $500 million in liquidity in the market may unlock some frozen real estate deals and literally set the stage for the next recovery.

Bottom line: This probably is among the best outcomes for Pacific Capital in one of the worst cycles for real estate imaginable. Ford Financial has bet $500 million that we are at the bottom — here’s hoping they are right.

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