By Pacific Coast Business Times Staff Monday, June 7th, 2010

Even as it operates under a tight regulatory regime, Pacific Capital Bancorp, the region’s largest banking company, confirmed to the Business Times that it is not terminating the lease on its downtown Santa Barbara headquarters.

It’s a sign that the Ford Financial Fund — a Texas-based investment group in talks with Pacific Capital over a $500 million rescue — is already making its presence felt in guiding the banking firm’s operations.

Pacific Capital, the struggling parent firm of Santa Barbara Bank & Trust, had previously said it was moving out of its Anacapa Street headquarters and consolidating into an existing space a block away on Carrillo Street. But the Ford fund, which likely will end up with up to 91 percent ownership in the bank, apparently wanted to keep its options open. So, Pacific Capital quietly has pulled the building off the market.

“We view it as a very positive sign that the Ford fund is involved with what the bank is doing,” said Debbie Whiteley, Pacific Capital’s executive vice president of corporate communications.

But Pacific Capital also had some bad news to deliver in its most recent quarterly report with the U.S. Securities and Exchange Commission, filed May 12. In that document, in which it reported an $83 million first-quarter loss, the bank said it had previously misstated its financials in unaudited filings, underreporting its losses by $3.1 million.

Those accounting errors, coupled with other “control deficiencies,” have led management to determine that the bank has “material weaknesses” in its internal control procedures that need to be remedied, the company said in filings.

Reviews of its loan assets revealed “that we did have sufficient loans that we felt were not recorded as they should have been,” said interim Chief Financial Officer Don Lafler. For example, some loan risks weren’t correctly graded and troubled loans weren’t charged off in a timely manner.

“Given the number of loans we have, we are not able to review every loan every quarter,” Lafler said. “We do it on a statistical basis. … If we know that loans are not performing as they should, we try to review those.”

The bank has previously found similar errors in its commercial lending accounting, and it is now looking to overhaul its internal control mechanisms.

“We’re going to look at more loans and look at them more frequently,” Lafler said.

The bank will bring in external consultants and has new review guidelines for internal loan officers. “As we’ve said previously, we’re not trying to build loan balances at this point, we’re trying to focus on reviewing the loans we have,” Lafler said.

Even as it cracks down on its own internal controls, Pacific Capital remains under intense scrutiny from federal regulators.

On May 11, it was placed under new regulations to boost its capital levels by September or potentially sell or liquidate the bank. Under the order from the Office of the Comptroller of the Currency, the bank has until Sept. 8 boost its tier one leverage ratio — its capital divided by its assets — to 9 percent and its risk-based capital ratio to 12 percent. On March 31, the ratios were 4.6 percent and 10.1 percent, respectively.

The Ford deal, which has a walk-away date of Oct. 26, would pump much-needed capital into the banking firm but would heavily dilute shareholders. And even if it gets Ford’s $500 million infusion, Pacific Capital may need to raise additional money to meet the demands of regulators.

“If we fail to consummate the investment and the recapitalization or otherwise fail to raise sufficient capital, our ability to continue as a going concern would be in doubt and we may file for bankruptcy and/or the bank may be closed by the OCC and placed into FDIC receivership,” Pacific Capital said in SEC filings.

The bank has also entered a written agreement with the Federal Reserve Bank in which the company said it will not pay out dividends, buy back stock or take on debt without the Fed’s approval, and that it will come up with a plan to fix its capital problems by August.

On Wall Street, Pacific Capital’s stock price has bounced around between a low of 61 cents and a high of $5.62 over the past year, as investors take in news of its regulatory orders and recapitalization plans. Over the week ended June 1, Pacific Capital shares were down 5.8 percent to $1.62.

On Anacapa Street, the banking company will retain the lease on its headquarters, although its plans for the building remain ambiguous. The bank told the Business Times on June 1 that it is no longer seeking an early lease termination, as it had previously said it would. It will instead retain the 30,000 square feet of prime downtown space until at least May 2011, as under its original lease, Whiteley said.

From a commercial real estate perspective, that means a significant chunk of office space will no longer sit on the market, driving up vacancy rates. But what it means for the bank is unclear. On the phone, raving about the views from her new Carrillo Street office, Whiteley said that because Pacific Capital has already moved much of its corporate operations to the Carrillo building, it likely won’t ask employees to pack up boxes and move right back.

“I don’t know at the moment what will be done [with the Anacapa Street building],” she said.

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