Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Pacific Capital Bancorp (NASDAQ:PCBC)

Q1 2009 Earnings Call

April 30, 2009 11:00 am ET

Executives

Tony Rossi - Financial Relations Board

George Leis - President and CEO

Stephen Masterson - CFO

David Porter - Chief Credit Officer

Analysts

Aaron Deer - Sandler O'Neill Asset Management

Julianna Balicka - KBW

Jeannette Daroosh - JMP Securities

Trevor Morris - UBI

Operator

Ladies and gentlemen, thank you so much for standing by. Welcome to the Pacific Capital Bancorp first quarter 2009 results conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today Thursday April 30th of 2009.

And now I'd like to turn the conference over to Tony Rossi of Financial Relations Board; please go ahead sir.

Tony Rossi

Thank you, operator. Good morning everyone and thank you for joining us to discuss first quarter results with the management of Pacific Capital Bancorp. With us today from management are George Leis, President and Chief Executive Officer; Stephen Masterson, Chief Financial Officer; and Dave Porter, Chief Credit Officer. Management will provide a brief summary of the results and then open up the call to questions.

During the course of the conference call, management may make forward-looking statements with respect to the financial condition, results of operations and the business of Pacific Capital Bancorp. These include statements that relate to or are dependent upon estimates or assumptions relating to the prospect of loan and deposit growth, credit quality trends, the health of the capital markets, the operating characteristics of the company’s income tax refund program and economic conditions within its market.

These forward-looking statements involve certain risks and uncertainties, many of which are beyond the company’s control. Forward-looking statements speak only as of the date they are made and Pacific Capital Bancorp does not undertake any obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

At this time, I would now like to turn the call over to George Leis. George?

George Leis

Thanks Tony. Good morning and thank you all for joining us this morning. I’m going to provide a brief overview of the first quarter of 2009 and then I’ll turn the call over to Stephen Masterson, our Chief Financial Officer, who’ll review the financial results in more detail. Following Stephen’s remarks, I’ll conclude with our outlook.

In the first quarter, we had a net loss of $7.9 million of $0.17 per share. The Core Bank generated a pre-tax loss of $69.8 million. As expected we continued to experience a high level of credit cost. In the Core Bank, we recorded a provision for loan losses at $73.5 million and had net charge-offs of $73.4 million. Approximately, half of the net charge-offs occurred within our residential construction portfolio as the value of the collateral underlying new launch continued to decline. The deterioration incurred in loans, that were already in the non-performing category entering the quarter, we did not see any meaningful new inflows of residential construction loans into non-performing this quarter.

With pay downs and charge-offs our residential construction portfolio now stands at $197 million, which is just 4% of our total loan portfolio. The rest of our portfolio was showing the strength that is consistent with the recessionary economy. Total non-performing loans in our C&I portfolio increased to $53.2 million, from $40.2 million during the quarter. We also charged-off $27.6 million from the C&I portfolio.

The most significant areas of weakness within the C&I portfolio are businesses that are related to the residential construction industry. While we have seen some modest deterioration, a commercial real estate portfolio continues to perform relatively well. The provision we recorded this quarter has kept our Core Bank allowance from loan losses at a very high level.

As March 31, 2009 our allowance represented 2.48% of total loans. Approximately 90% our allowance is allocated to loans that are not currently impaired which we believe positions us well to absorb the inherent losses in the portfolio. I would also like to note that we've included some additional disclosure on our non-performing, delinquency and charge-off trends in our press release today which can be found at the end of the financial table. We had another strong quarter of deposit gathering and we are pleased with the results we are seeing from the increased emphasis we are putting in this area. During the first quarter, we increased the Core Bank balances of NOW accounts by $72 million and non-jumbo CDs by $183 million.

In the current environment, we believe that capital and liquidity are of paramount importance and wanted to give ourselves as much, much ability for making decisions about our balance sheet. During the first quarter, we made a decision to significantly increase our liquidity which included holding most of our new deposits in short-term, highly liquid assets. The yields on these assets were very low which resulted in some margin compression during the first quarter. But we are wiling to make the trade-off in near-term margin in order to preserve our flexibility to make strategic decisions that will support that long-term health of our bank. I will talk more about our plans to manage the balance sheet a little later in the call.

Turning to the RAL and RT program. They generated $55 million in pre-tax income which was down from $108 million in the first quarter of 2008 and lower than our expectation. There were a number of factors that contributed to the decline in the pre-tax income this year, many of which reflect trends experienced across the entire professional tax and RAL RT industries.

First, the number of returns prepared across the industry was this year down. This appears to be a direct result of the weak economy in which more people are trying to save money by preparing their own tax returns. With returns down, there were fewer opportunities for RAL and RT transactions which caused our overall number of transaction to be lower than we expected.

Second, and more notably with a higher loss rate experienced by all RAL providers this year. This was due to a significant change in the IRS tax screen methodology that was implemented this year. To put this in context, our underwriting criteria as with all RAL providers is based on our historical analysis of IRS payment pattern. Essentially, when we receive a tax return that has been prepared and submitted to the IRS, we take a look at all of the information provided and the claims being made by the tax payer. And then we ask the question, is there anything about this return that might cause the IRS not to fully pay the refund. If there are any characteristics present on the returns that have shown to lead it’s a non-payment by the IRS, then we don’t make the loan. If the return comes up clean then we extend the RAL.

When the IRS changes their screening methodology which they did significantly this year, it causes problems for underwriting. We started this year with the exact same underwriting criteria that produced our low loss rates and strong performance last year. Unfortunately, the IRS does not share their screening methodology with outside parties. So we can't prepare in advance for changes. We simply have to recognize changes in payment patterns in the IRS as quickly as possible, understand why they are happening and then make adjustments to our underwriting during the season.

This year the IRS significantly expanded the number of returns that they held up for review. In many cases, this has resulted in the IRS asking the tax filer for documentation to support the credits being planned on their tax returns. This has had two effects. One; it has slowdown the payment processing time. And two; it has resulted in the IRS finding a higher number of noncompliant returns where payment is denied. In many cases, these are the returns that were exactly the same ones that were paid by the IRS last year.

Most of the issues occurred during the first three weeks of the program, after three weeks we had enough data to determine that the IRS payment patterns had changed and we began to adjust our underwriting to reflect our analysis of the new trend. We have yet to receive a determination from the IRS about whether many of the refund underlying the RALs made in the first three weeks will be paid or not. We suspect that many will be deemed noncompliant by the IRS and the IRS won’t pay the refund. But it's also flat likely that the IRS will remit payment on some of them.

Internally, at this point we consider these loans more like a delinquency than are loss. However, for accounting purposes we must take a conservative approach and classify them as a loss. Once a RAL has been outstanding for 60 days, we automatically charge it off, so most of the RALs that were still outstanding from those first three weeks had to hit the 60 day mark by March 31st and were charged-off. We fully provided for all other outstanding RALs from those first three weeks.

After the three week period we made adjustments to our underwriting that significantly reduced our exposure to return that were being held up for review and we have seen payments in line with historical patterns. We are making a concerted effort to maximize our collection on the RAL outstanding from the early part of the season. This includes working with tax preparers to help tax filers provide the required supporting evidence to the IRS, which would ultimately result in the IRS releasing payments of the refund and paying off the RAL.

Just the end of the quarter, we had steadily received payments on returns that have been held up from the first three weeks. Since we have already charged these off, they will be recorded as recoveries which could serve to lower our provision for RAL losses in future quarters. Accordingly, with a conservative approach we have taken, we do not believe that total losses in the 2009 season will exceed our current expectation and it is quite possible that they might ultimately be lower in which case the recoveries would positively impact pre-tax income this year.

In addition to the change in IRS screening methodology, there were a number of other factors that caused a negative variance to last year's program. First; we had fewer recoveries of prior year RAL. As we indicated in our last call, with loss rates being much lower in 2008, than they were in 2007, we had fewer recovery opportunities. This is reflected in the higher provision this year as we had fewer recoveries to offset the charge-offs.

Second, is the second variance was the mix shift towards refund transfers. Refund transfers accounted for 77% of our total transaction this year, compared to 73% last year. It appeared that in the current economic environment, consumers were more price sensitive and showed the lower cost option for receiving their refund. We estimate that the mix shift resulted in a negative variance of between $5 million and $6 million.

And third, higher funding cost resulted in a negative variance of approximately $8.4 million. This could have been even higher but as it turned out, we did not have to make much use of the syndicated credit facility that we established. We were able to fund the program almost entirely with brokered CDs and other deposits, which was still and more expensive than last year's funding cost but not quite as high as we thought it might have been if we had to make greater use of the credit facility.

On the positive side, we improved the operational efficiencies of the program and also paid out less in performance fees to tax preparation offices due to fewer transactions this year which resulted in an expense reduction of about $6 million. Although we are disappointed with the results this year, the outlook for the RAL RT business remains fundamentally healthy. The consumer demand is still strong and there are some who are predicting that the changes to the tax cut being [enacted] will drive more tax payer to use professional tax preparation services which would create more opportunities for RAL and RT transactions.

In addition, we have already analyzed the IRS payment patterns for this year and identified areas of concentration in certain tax return characteristics that led to the higher than expected losses. We believe we can adjust our underwriting criteria to screen for these tax return characteristics which would result in a lower loss rate in future years.

Now, I will turn the call over Stephen Masterson for further discussion on our quarter results. Stephen?

Stephen Masterson

Thanks George. Good morning everyone. As I begin my review unless I indicate otherwise, I’ll speak to the result of the Core Bank, which excludes the impact of the RAL and RT programs. The Core Bank's net interest margin declined to 2.83% during the first quarter of ’09 from 3.05% in the fourth quarter of ’08.

The decline in net interest margin is primarily the result of the company being focused on three major priorities. First; increasing our near-term liquidity, Second; reducing our loan-to-deposit ratio in order to improve our flexibility in our balance sheet. And third; being very prudent in our asset growth in order to keep our capital ratios as high as possible.

While, we believe the net interest margin will remain depressed for sometime, we do expect to see some degree of improvement going forward as we runoff certain higher cost liabilities. Our non-interest income was $15.6 million in the first quarter of ’09 compared to $8.6 million last year. The decline is primarily due to two factors, first; lower service charges and fees, due to lower loan production and loan fees and second; lowered trust and investment advisory fees due to the decline in asset valuations over the past year.

Total non-interest expense was $59.9 million in the first quarter of ‘09, compared to $54.7 million in the same period last year. The increase is partially attributable to a $1.2 million in FDIC insurance premiums. Our first quarter 2009 non-interest expense also included approximately $3.8 million that have been include for severance expense related to the reduction in headcounts that was announced in March of 2009.

To provide a little more color on the reduction in force, the staff reductions are largely coming from the following areas. First; we’ve identified by some low producing branches, as measured by deposits that are overstaffed and can operate more efficiently with fewer employees. Second; we have made some reductions in our business development staff, eliminating our lower performers and giving more territory to our higher performers. Third; we are scaling back our SBA lending operations and reducing staff in that business. And fourth, we are eliminating some layers of management throughout our back offices.

The one area that has been largely unaffected is the Credit Administration group where we have in fact added personnel to help manage remediation of our troubled assets. We expect the reduction in headcounts to reduce our annual operating expenses by approximately $20 million.

Turning to the balance sheet, our total loans were $5.69 billion at March 31, 09 compared to $5.76 billion at December 31, 2008. During the first quarter, we renewed $162 million in loans, we made approximately $144 million in new loan commitments and we funded approximately $105 million of new loans. Total deposits were $5.46 billion at March 31, 09 compared to $5.27 billion of December 31, '08. The figures I provide exclude brokerage CDs in both periods that were added as funding for the RAL program as well as $235 million in non-interest bearing demand deposits on the balance sheet at March 31st, which represents RAL checks that have not yet been cashed by the tax payer. As George mentioned, the increase in Core Bank deposits came primarily in NOW accounts and non-jumbo CDs.

Turning to asset quality, non-performing assets increased to $271 million or 3.41% of total assets at March 31, '09. This is up from $241.5 million or 2.65% of total assets at December 31, '08. The increase in non-performing assets is primarily due to deterioration in the C&I and residential mortgage portfolios.

Our net charge-offs for the first quarter were $73.4 million or 5.18% of total average loans on an annualized basis. Our total delinquencies increased to $344 million or 6.05% of total loans at March 31 '09 from $316 million or 5.49% of total loans at December 31, '08. The increase was primarily due to the C&I residential real estate and consumer portfolios. Our allowance for loan losses increased to 2.48% of total loans at March 31, 2009 from 2.44% at December 31, 2008. Our coverage of non-performing loans was 54% as compared to 60% at December 31st.

Moving on to our capital ratios. At March 31, 2009, we had a Tier 1 ratio of 11.3%, a Tier 1 leverage of 6.8% and a total risk based capital ratio of 14.1%. Based on discussions with our regulators, the conclusion of our most recent exam, we believe that the regulators will establish the following minimum capital ratios for the bank. A minimum Tier 1 leverage ratio of 8.5% as of June 30, 2009 and 9% as of September 30, 2009, and a minimum total risk based capital ratio of 11% as of June 30, 2009 and 12% as of September 30, 2009. We expect that the bank will continue to be deemed well capitalized under existing regulations notwithstanding the establishment of these minimum capital ratios.

George already discussed the RAL and RT programs in great detail. There is only other item that I want to address in that regard. As we have mentioned before, we did not use a securitization vehicle for the 2009 program. Accordingly, on the income statement for the RAL and RT program you will see that there is no gain on sale for RALs recorded this year compared with a gain of $44.6 million as we have recorded last year. This is strictly a function of the bank keeping all of the RALs this year on our balance sheet all the revenue being reported as interest income for the RAL business. This explains the one major difference in the RAL accounting this year.

Now I’ll turn the call back over to George. George?

George Leis

Thanks Stephen. With the unemployment rate in California continuing to rise and real estate values continuing to decline, we are expecting our credit cost to remain elevated for the foreseeable future. Accordingly, our primary focus will continue to be maintaining a strong balance sheet and strong capital ratios.

One strategy that we are employing to improve our capital ratio is reducing our concentration of commercial real estate. This is being done by limiting renewals and originations and allowing this portfolio to amortize at its scheduled rate of approximately $150 million during 2009. We also recognize that the pre-provision, pre-tax earnings power of the Core Bank is not as strong as we’d like. We believe that we must make significant structural changes in the Core Bank in order to reach our goal of being a high performing bank.

The plan reduction in force of approximately 22% that was announced in March, is just the first step in a reorganization plan being developed that we believe will put the company in a better position to create shareholder value in the years ahead. This plan will consider asset sales, business divestitures, outsourcing relationships and other strategic changes designed to produce a more streamlined bank capable of generating higher returns for shareholders.

We understand that there might be many questions about our reorganization plans. But until we have made final decisions, we aren’t going to speculate about things we may or may not do and we will have to politely decline to answer any questions you have of that nature. We will certainly be happy to answer any questions you have about the performance of the company. Today, Stephen and I are joined by Dave Porter, our Chief Credit Officer.

Operator we are ready for the first question.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen we will now begin the question-and-answer session. (Operator Instructions). Our first question comes from the line of Aaron Deer with Sandler O'Neill Asset Management. Please go ahead.

Aaron Deer - Sandler O'Neill Asset Management

I guess starting with the RAL program. Can you give some better indication in terms of what your expectations are for the full year losses in that program? I'd like to get a little bit more color on what kind of recoveries you might expect based on what you've seen so far in terms of collections in this first three weeks of the program?

Dave Porter

Yeah. Hi Aaron its Dave Porter. In the first quarter we take some charge-offs that are a little larger than we see for the full year because of the timing of the payments. But, I think what we're anticipating for the full year at this point is about 130 to 135 basis point net charge-off number for this year's activities for the entire of 2009 season.

Aaron Deer - Sandler O'Neill Asset Management

And since, I guess it's tough to gauge exactly what the average earning assets are in that particular, can you maybe give us a better sense of what that would be in a dollar amount?

Dave Porter

I don't think at this point. Yeah. I think until we see the total volumes that come in, and we haven't seen April 15 yet, it would be hard for us to give you that specificity at this point.

Aaron Deer - Sandler O'Neill Asset Management

All right. And then on the RTs, can you explain why the RT fees went down from last year if the volumes went up from I think they were at $5.4 million it looks like they are about 5.6 million this quarter?

Dave Porter

You know I think it was a factor of lower average fees, pricing on those and the nature of the RTs coming from the tax preparers or coming from the electronic software preparation like into its total tax et cetera and the difference in the fees we get from those different channels.

Aaron Deer - Sandler O'Neill Asset Management

Okay, and then I guess a question with - I was particularly surprised to see that the performance in the RAL business, your guidance have been for similar volumes and you did suggest that the profitability would be lower, but obviously its much, much lower than I guess I was lead to believe. Have you considered providing monthly performance statistics on this program so that investors and analysts might have a better sense of what's going on throughout the RAL RT seasons we can avoid these kinds of surprises?

George Leis

Aaron, its George. You know we've talked about that certainly. Here is the problem, it's really too hard for us to predict the volumes of that business, so you know looking forward and trying to give you any forward guidance is just very hard. And a year like this where distortion is number so it would be just very difficult for us to do that.

Aaron Deer - Sandler O'Neill Asset Management

But I am not asking for, obviously, the guidance clearly is a challenge that’s why I am wondering if it's possible to give monthly statistics in terms of what you are seeing as you go through the season. And this is a big variable for the company and I just --

George Leis

You made a good point, Aaron, I think that’s one of the things that I think Stephen and Dave and I will consider to help you guys to figure it out going forward.

Operator

Thank you. Our next question comes from line of Julianna Balicka with KBW. Please go ahead.

Julianna Balicka - KBW

I have a question about the, when you referenced the 90% of your reserves for loans that are not currently impaired, right?

George Leis

Right.

Julianna Balicka - KBW

Did I hear that correctly?

George Leis

Yes, Julianna.

Julianna Balicka - KBW

Yes, so 10% that is for your impaired loans, what is the coverage on your impaired loans and is that because you have such strong collateral on it -- intuitively that seems low but then again am not a banker?

George Leis

Well the balance of the non-performing loans that are impaired have been as you know are looked at from a collateral standpoint and have been marked down to what’s considering fair value. So, as we go through the cycle and we get updated appraisals and do analysis to determine what fair value is, we will continue to mark that portfolio to its fair value, each quarter. So as a result there isn’t a lot of remaining allowance against that portfolio, particularly if we deemed it to be collateral dependent which most of it is at this point.

Julianna Balicka - KBW

And then could you refresh our memory and how much you've already marked down the impaired loans and more specifically in your construction portfolio like what sense on a return value or carrying out net adjust?

Dave Porter

Yeah, I can do that I may have to get to you Julianna, but most of this, as you know in 2008 the majority of charge-offs for the company occurred in the construction and land portfolio, particularly around residential construction. The same is true in the first quarter, of this year. So, if you look at those totals its probably, I'm going to guess, estimate maybe 25 to 30% of that portfolio.

Julianna Balicka - KBW

Were you shocked by the magnitude of the decline in some of those price values?

Dave Porter

We've seen some recent evidence of significant decline in the price values even as recently as six to nine months based on previous appraisals. So, there has been significant decline in particularly the upstream development like land and [lot] development. I think very, very rapid decline in values.

George Leis

And Dave, that portfolio, that residential home builder portfolio has been reviewed, examined and pretty much entirely classified, right?

Dave Porter

I mean obviously with what's happened there with the industry, we've looked at that very closely with the regulators, with our own loan review and the marks we've taken now are very current marks and hopefully going forward, we won't see the same deterioration particularly after you've had a significant write-down on some of these assets.

George Leis

And Dave wasn’t the, do we have a handful of large loans in that granularity, I mean that concentration doesn’t exist in the remaining part of the portfolio; it’s a little more granular. Would it not be true?

Dave Porter

Yeah. Exactly, I think we saw three or four large accounts in the fourth quarter similarly in the first quarter, three or four large accounts that made up the majority of the markdowns and we just aren't seeing that opportunity to do that in this portfolio going forward again.

George Leis

Thank goodness.

Dave Porter

Thank goodness. Yeah.

Julianna Balicka - KBW

Before I step back, I just wanted to get your sense on two follow-up questions to that. When I look at your delinquency data, your CRE delinquency seems to be just kind of slowing growing. Just wondering what you're observing in the market, as to what's going on and what you sense is how it's going to perform in about a year as market participants? And the second thing is while there was definitely a big spike in the early delinquencies in the third quarter in construction which you are clearly working through in marking down as you need.

Can you talk about your ability to sell your non-performing loan or resolve your non-performing loans because that level is growing, but also because your early stage delinquency number it looks like its stating fairly steady so like what are the new construction loans that are starting to trickle in there? I mean the rate of change has slowed but there is still some growth right?

Dave Porter

Yeah, actually it looks like on our delinquency is on working with construction, it's actually come down a little bit from fourth quarter. And then on our non-performing loans on construction that’s also come down if you look at the table on page 15.

Julianna Balicka - KBW

Yeah I looked at that and so it looks like the 30 to 89 migrated into NPLs right, but then they are still like a baseline level 30 to 89 are still sitting there and I was wondering are those new loans or they are like ones from before like what new weakness are you seeing in construction if any like, some other banks have like condos start popping up and things like that?

George Leis

I can't say that it's been new this portfolio has been a problem I think starting in the first quarter of 2008 for us. So I am not sure we are seeing a lot of new activity coming to that portfolio this quarter, Juliana.

Julianna Balicka - KBW

Right.

Dave Porter

Your question around the commercial real estate delinquency; we're watching that very closely, obviously, but we haven’t seen the delinquency metrics really be too negative at this point. I think it's been relatively manageable.

Julianna Balicka - KBW

Okay. And then finally and I'll step back within the, so you talked a little bit about the capital measures are being implemented, can you talk about any new credit risk measures that are being implemented or any actions on the credit front?

Dave Porter

Well absolutely yes, we are taking some, we are looking at a lot of things right now, but clearly what I think we’ve seen that occurred in the past 15 months is that we need to maintain our whole limits for specific accounts at smaller levels than we have historically. We also need to be very conscious doing things outside of our core footprints, especially in the construction area. In addition we are focusing and controlling our underwriting, particularly in the construction area to a single group that we feel is focused on that specific type of blending in all approvals for new activity will be going through that group.

George Leis

And Dave; Julianna, concentration management is a big initiative, we focus in our company, so again managing our commercial real estate exposure to ultimately 250% our capital by the end of the year, and we are able to do that because that portfolio amortizes at about a $150 million for the remaining part of the year. I think, Dave touched on it, we want in more granular loan portfolio, so we are not going to be originating going forward any of deals that are so large, in our commercial banking group Julianna, we setup a syndications capability and we are going through the portfolio and large loans that are doing well in performance, we are first looking at those, where we could syndicate some of the amount away from the company and I think like Dave said going forward we are going to have a strict set of hold limits here both by individual credit and by relationship.

Dave Porter

Yeah. Right.

Operator

Thank you. Our next question comes from the line of Jeannette Daroosh with JMP Securities. Please go ahead.

Jeannette Daroosh - JMP Securities

Good morning. Thank you for taking my questions. I wanted to touch on the individual minimum capital requirement at the bank. You've provided the ratios that the regulators are targeting. Can you tell us where those ratios were as of March 31? And then if they are below the targets that the regulators have set forth. How you intend to achieve those higher levels?

Stephen Masterson

This is Steven, I'll touch on the ratios at March 31, and you can find there are [carried] back on page 12 of the tables in the press release. The leverage ratio at 331 was 6.8%. The Tier 1 ratio was 11.3% and the total risk-based capital was 14.1%. The leverage ratio that calculation changes based on the mix of our balance sheet and as we balloon up the balance sheet during the RAL season with cash and liquidity to fund the program, it hurts our leverage ratio. So, at the end of the year, if you look back to 1231, that Tier 1 leverage ratio was 8.8% and it has comes down to 6.8% at 331 largely because of the cash and liquidity that we have sitting in our balance sheet. So, one of the measures that we're looking at to work with that ratio is to take some of that liquidity and use it to pay down some of our existing liabilities, our higher cost liabilities and things of that nature. And as you see the broker CDs roll-off our books, they are staggered on; they stagger off through the RAL season. When you see that 2 billion of RAL brokered CDs come up you'll see that ratio go back up quite significantly. 8.5% was the target for June 30, 9% was the target for September 30 and I think we are looking at all options as to how we ensure that we hit those ratios through our balance sheet management strategies and so forth.

George Leis

We've really committed to maintain a fortress balance sheet here. And we do have a bit of a concentration in commercial real estate here. We think it's prudent to maintain a little higher level of capital given the concentration and as we work our way out of that concentration maybe we could - maybe those could --

Stephen Masterson

That'll certainly help as we reduce the concentration on our commercial real estate; that will certainly help that leverage ratio. And you know that the Tier 1 ratio and the total capital ratio, we don’t see any problems with that that is significantly in excess of the minimums to be well capitalized. In fact, the leverage ratio is significantly in excess of the minimums to be well capitalized under the regulations. So we feel like we are well capitalized, but as George said we will continue to bolster that to weather the storm in this economy.

George Leis

And, Jeannette we're going to use all, again, I think we are open to all needs, right. We started with a reduction in force; we have trimmed the dividend payment last quarter. We are going to run down some of the commercial real estate exposure. So we are using all of the tools that the management team has available on its balance sheet to push that ratio up.

Jeannette Daroosh - JMP Securities

Okay. Is it wrong to assume that in the interim until you need those higher targets that there could potentially be some operating restrictions placed on the bank by the regulators?

Stephen Masterson

I don’t think so. I don't think there is any operating restriction on what we are doing or things like that. We typical don’t talk about any regulatory issues or examinations or actions; but since we disclosed these ratios in our press release, we felt it was important to disclose those targets for June 30 and September 30.

George Leis

We feel we maintain a very good working relationship with OCC and keep pretty strong level of communication with them. So, yes I think, we’re looking at everything, I think we have some levers that we can pull on our own balance sheet and I think you will see you do that, going forward.

Jeannette Daroosh - JMP Securities

Okay. If I may, one additional set of questions relating to your originations in the quarter. You indicated in the press release you renewed a $162 million, you could make commitments of $144 million and you funded a $105 million of new loans. I was wondering if you could provide us with a little bit of detail in terms of what loan categories were included in these renewals commitments in funding?

David Porter

Jeannette this is Dave Porter. I can get back to you with that, I don’t have that at hand at the moment.

Operator

Thank you. (Operator Instructions). We have a follow-up question from the line Aaron Deer with Sandler O'Neill Asset Management. Please go ahead.

Aaron Deer - Sandler O'Neill Asset Management

Hi guys. It sounds like part of your program with respect to looking at the long portfolio and is to reduce size concentration, can you give us a sense of what you do consider to [beat] a large loan and how many loans, a relationship do you have at that size and of what types?

Dave Porter

I think over the years the bank has grown with some of its long time customers, up to levels that we wanted to maintain a sole relationship with our borrowers, so we tended to grow with them as they grew. And I think in looking at where we are and particularly in a credit cycle as we are now that I mean sometimes we got a little to high with some of our customers.

George Leis

Our history Dave and Aaron, as a community bank, in fact I believe almost, our requirement was to stay with a client. It was almost a bad thing to not do that. And we have some very, very good customers here as you can imagine, Aaron, who has been with us a long, long time. But I think the lesson that we learned going through this cycle, particularly in our residential home building portfolio. Steve and Dave isn't it 10, 15 names were very large and we talk about granularity now, we talk about diversification and I think one of the things that we don't want to do for the next cycle, we'll prepare the company for the next cycle, we're no longer just a community bank. We're approaching regional bank sort of status and we want to have a discipline in place. We still want to do the relationships, we still want to be that great community bank for our clients. But, with a syndications capability and maybe a little finer, maybe a little more discretion on doing one of the big (inaudible) plus a little tighter underwriting standards I think will put this company in good stead and allow us to maintain the relationships that we've grown to really depend on us but minimize the concentration risk that those have, the risk management for this management team is a very important part of doing business and that's part of our search strategic plan going forward.

Stephen Masterson

Let me just add to specifically around what you are asking about, levels that we have established really depend on the type of lending we are doing in the higher risk type of loans, for example, unsecured type lending. We will have smaller hold limits than other types of lending that are secured, stabilized, things like that. So we have a whole matrix of hold limits we are working at. But in general we want to reduce the exposure to our top 10 and 25 largest relationships to our capital base. And that’s part of this going to be impacted by this reduction overtime particularly in the CRE concentration.

George Leis

And Aaron I think the last thing that we're going to do, we set up a director's loan committee here. And so with guidance from our Board of Directors we are going to set the sort of standards for what we think our bank should be looking like in terms of its credit picture going forward. We want to rely maybe less on history and more on some proactive view of what we should look like as a company going forward. So you will see us in the future have a standard on how we underwrite commercial real estate loans. And we have a portfolio in our book for example, Aaron it's in our IPOG book, it's a book that we acquired that has almost zero, very low delinquencies and no charge-off. And it was underwritten very precisely and it was unwavering in its underwriting and I think what you'll see us do is adopt those kinds of standards for our portfolio, so that if we do decide to have a concentration it is well managed. We can model how it's going to perform going into it and less surprises in a cycle.

Aaron Deer - Sandler O'Neill Asset Management

Okay. Out of those larger relationships that you mentioned, how big are those relationships typically and how, to where would you like to work those down?

Dave Porter

I’d say we'd like to get the top, if our top 25 relationships, let's say a 100% of capital at this point, I think we’d like that to reduce that down to 75% to 60% of capital.

George Leis

And again if they were to go credit-by-credit Aaron and look at a whole bunch of things, the relationship we have with that client and if it’s a full relationship the industry that their clients are operating in and if it’s an industry want to stay in, I mean I think we are adopting a much more robust risk management structure here that will allow this company Dave and Stephen and our head of our lending divisions, to make more informed decisions about where we want to be based on industry type, property type, all that stuff. Less based on the relationship, more based on a proactive view where we should be as the company.

Aaron Deer - Sandler O'Neill Asset Management

I guess, lastly Stephen were there any severance charges that were taken in the quarter?

Stephen Masterson

Yeah, we took $3.8 million in accrual and I forget the total amount that was paid out but good portion of has been paid since the end of the quarter.

Operator

Thank you and our next question comes from the line of Trevor Morris with UBS. Please go ahead.

Trevor Morris - UBI

Yes, good morning. I was wondering if you could put any kind of a dollar amount on the roles that were charged-off in this first quarter to 60 days in terms of -- I didn’t have chance to check these numbers to thoroughly most of those times. But do you expect the recovery here in the second quarter, I believe are you putting any kind of a dollar value on this?

David Porter

Trevor this is Dave Porter, I think in the table we show about 78 million in charge-offs for the RAL for the first quarter.

George Leis

Yeah. Its on page 12.

Trevor Morris - UBI

Thank you. And you expect an X amount of recovery in the second quarter. Correct? On this have you got any kind of a…

George Leis

Did you not just say Dave on our call that you had a view what our total loss exposure would be for that…

Dave Porter

Yeah. But, that's really through the year, the total year. So, for the second quarter I really don't have a…

Trevor Morris - UBI

Well, that's okay. What about the remaining three quarters then?

George Leis

Somewhere, I think Dave had mentioned, we're looking at about 130 to 135 basis points of total charge-offs for the year. From where we are today that's probably going to be 25 to 30 basis point improvement.

Trevor Morris - UBI

Okay. Okay. Then can I have a, can I do a second question here. George mentioned in the re-org plan that's now in play that you had some asset sales in mind and some outsourcing. Can you elaborate on those at all?

George Leis

I certainly can. I think what I've told the company is that everything is being looked at and it’s a little premature for me to be specific, but my commitment to our Board and to you guys is that I'm looking at everything on our balance sheet and because I don't want to speculate when I get a sort of final plan in place, I'll share with the analyst community as well as my company.

Operator

Thank you. And we have a follow-up question from the line of Julianna Balicka with KBW. Please go ahead.

Julianna Balicka - KBW

Hi. I have a quick detailed question. Sorry if you stated it already earlier and I didn’t catch it. For the dollar, do you have the dollar amount of the refund anticipation loans that were held in the first three weeks and what of those have been refunded in the second quarter?

Stephen Masterson

That was the total hold in those first three weeks was about $300 million, Julianna this is Steven. How much has been collected since then? I'm not completely positive Dave if you don't have [uncertainties].

Dave Porter

I don't

Stephen Masterson

Let me get back to you on that Juliaana.

Julianna Balicka - KBW

Very good and within the examination you referenced in your press release with the capital ratios. Did the RAL business come up at all, or was everything the same as always there?

Dave Porter

Could you repeat that question I missed a part of that.

Julianna Balicka - KBW

I said was the examination that you referenced in your press release, was the RAL business the view on the RAL business from the regular same as always or was there any more, any change to that particular lending type?

George Leis

You know there was no changes, no comments, nothing, they review that program every year and it was no different in 2008 as it been it was before, same as always Juliaana nothing new there.

Julianna Balicka - KBW

And I sure appreciate that?

Dave Porter

Well I think, I just want --

Operator

Thank you and at this time there are no further questions. Please continue.

George Leis

Well I just wanted to say thank you for joining our call. We appreciate your time and interest in our bank and we look forward to speaking with you next quarter. Thank you everybody.

Operator

Ladies and gentlemen and that does conclude the Pacific Capital Bancorp first quarter 2009 results conference call. At this time you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Pacific Capital Bancorp Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts