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Updated story: Pacific Capital chief briefs shareholders on $500M deal

By   /   Thursday, April 29th, 2010  /   Comments Off on Updated story: Pacific Capital chief briefs shareholders on $500M deal

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[Editor’s note: This story was updated at 3:20 p.m. April 29 with comments from Gerald Ford.]

Hours after signing a $500 million deal that could transfer control of Pacific Capital Bancorp to a Texas billionaire’s firm, the banking company’s executives went before investors at its 50th annual shareholder meeting to explain the bold transaction that would keep the Santa Barbara Bank & Trust brand alive in the Tri-Counties.

The largest bank in the region with a $4.9 billion loan portfolio, Pacific Capital has struggled with $500 million in losses, driven by bad real estate loans, since the second quarter of last year. For more than a year, the banking firm has been under a voluntary agreement with federal regulators to boost its capital levels, but it missed the targets laid out for it each step of the way.

That left Pacific Capital little choice but to find a major investor. At about 3:45 a.m. April 29, the company signed a $500 million deal with private equity fund Ford Financial Fund, controlled by Texas billionaire Gerald Ford, the former CEO of California Federal Bank, which he plucked from the ashes of the savings and loan crisis and later sold for $6 billion. Under the agreement, the Ford Fund will acquire as much as 91 percent of the company’s common stock.

“Not a lot of people have the appetite for this level of risk or trouble,” Ford told the Business Times. “We’re putting our money where our mouth is.”

The key points of the deal are:

• The Ford fund would end up with between 80 percent and 91 percent of Pacific Capital.
• Current shareholders will be diluted heavily but have a chance to buy up to 20 percent of Pacific Capital at the same 20 cents a share Ford will pay.
• The U.S. Treasury would take common stock at 20 cents a share instead of cash for its $180 million in Troubled Asset Relief, or TARP, money.
• Bondholders will take a hit, with some cashed out for as low as 30 cents on the dollar.
• With approval needed from regulators and counterparties, it’s unclear when the deal will close.

“The Ford investment is the keystone of our overall recapitalization plan,” Pacific Capital CEO George Leis told shareholders at the company’s annual meeting April 29. He said the deal “represents the most attractive available alternative” given the bank’s losses, capital problems and mounting pressure from regulators.

Pacific Capital’s bleeding continued this quarter with an $80 million loss that brought the bank’s tier-one leverage ratio — its capital divided by loans and other assets — to 4.6 percent. That figure is far short of the 9 percent regulators wanted to see late last year.

Pacific Capital described the Ford deal as a recapitalization. It will involve translating the $180 million in Troubled Asset Relief Program funds the bank took on at the height of the financial crisis into common stock at 20 cents a share and asking some bond holders to take as little as 30 cents on the dollar — provisions the bank will need to get approved in order to seal the deal. At that stage, Ford would pay 20 cents a share for newly created stock to own 91 percent of the company’s common stock, the U.S. Treasury would own 7 percent and today’s shareholders would own 2 percent.

But the deal would also give shareholders — who have seen prices drop from more than $30 per share in recent years to lows around the $1 mark — a chance to buy in at the same 20-cents-a-share price as Ford. The current shareholders would be allowed to own as much as 20 percent of the company’s total stock, raising additional capital for the bank.

But ordinary shareholders are hurting, and some at the annual meeting were unhappy with Pacific Capital’s leadership. In an open comment session at the annual meeting, Irwin Pomerantz, a Los Angeles accountant who has held stock in the company since it was first offered fifty years ago, thanked Leis for taking action to save Pacific Capital. But he said he held Leis and the rest of Pacific Capital’s management responsible for the bank’s woes.

“I frankly find it hard to forgive you for what’s happened,” Pomerantz said. “It’s like reaching out to save myself from drowning.”

Leis responded: “I feel for every share owner who’s lost value in the company.”

Pacific Capital shares were down 47 percent to $2.19 on the deal’s announcement. On April 27, the day before the Ford investment was announced, Pacific Capital’s shares closed at $4.11 with a company market capitalization of $192 million.

The Ford fund is controlled by Ford, the former CEO at California Federal Bank, and Carl Webb, former president and chief operating officer at that bank. Los Angeles-based Cal Fed, as the bank was known, was the nation’s third-largest thrift with $50 billion in assets. Citi bought it in 2002 for about $6 billion. Ford and Webb would take seats on Pacific Capital’s board if their investment closes.

Ford is a billionaire banker from Dallas who entered the California market in 1994 at the bottom of the last housing cycle and built and sold Cal Federal at the top. Webb, also from Texas, is a banker and expert at real estate. He sits on the board of AMB Property Corp., the big San Francisco-based real estate company. Ford is chairman of the board of trustees at Southern Methodist University, and Webb got his MBA there.

Pacific Capital’s leaders said Ford was attracted to the bank’s deposit base, which has grown despite its woes and totaled $5.42 billion at March 31. The bank’s leaders sought to assure shareholders that the Ford would help the company with its mission to steer back to its community banking roots.

“This is not an absentee landholder,” said Ed Birch, chairman of Pacific Capital’s board. “They’re not going to do anything to foul up this franchise. They understand what makes it valuable,” Birch added.

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