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As our moniker suggests, we take great pride in providing in-depth analysis of risks that we believe other investors may be missing. We wanted to provide updated thoughts following our article last week and Pacific Capital’s (NASDAQ:PCBC) earnings and capital plan initiatives, which were announced Thursday morning.

We also wanted to share our thoughts on how we value PCBC in the face of the capital plan. Needless to say, our price target has been reduced. We believe tremendous confusion exists on the potential dilution from capital raise. Even at $2.19, it is our opinion that the shares have more than 80% downside following the completion of the capital raise. We calculate that PCBC is currently trading with a pro forma market cap of $7.4 BILLION and 7.5 times pro forma price to book value. This level is unsustainable. We previously thought the shares had downside to $1.50 to $2.30 per share. After terrible first quarter results and significantly higher dilution than we expected, we are adjusting our price target to $0.29 per share. At this price, the stock would trade at one times pro forma book value per share, represent a quick 45% return for Ford Financial, and trade at 16 times our revised “normalized” earnings power.

The first quarter results were significantly worse than we expected. The company lost $1.71 in the quarter, which drove book value down 46%, the Texas ratio to 123%, and TCE to 1.3%. Credit was a disaster again, with NPAs increasing 7% sequentially and 72% year-over-year. Even worse, the bank dropped below the threshold for “well capitalized.”

After ANOTHER disastrous quarter, we believe the Ford capital plan is the best option for current PCBC shareholders. We believe the alternative is likely failure (and a zero for current shareholders). We commend management for making the decision to recapitalize and save the bank, even if existing shareholders are left with virtually nothing. Under the plan, the United States Treasury will take a $145 million loss and PCBC’s debt holders will take a $122 million of loss. As a result, there is very little left over for current PCBC shareholders. Under the plan (and before the rights offering), the current shareholders retain a 2% ownership. If the stock price stays above $0.20 per share, we believe the rights offering will be successful. If that is the case, we calculate that PCBC will have almost 3.4 billion shares outstanding and have a tangible book value per share of $0.29. Below is our calculation.

Ford shares (fully converted)

2,500,000

Ownership

91%

Implied shares outstanding

2,747,254

Potential shares from right issue

628,323

Total pro-forma shares

3,375,576

Current tangible equity

96,931

Gains from TARP, preferred, debt

266,000

Ford capital

500,000

Rights offering

126,000

Total Pro Forma Tangible Equity

989,500

Pro Forma Tangible Book Value

$0.29

Based on our analysis, at $2.19 per share PCBC is trading with a $7.4 BILLION pro forma market capitalization and 7.5 times pro forma price to book value. The best banks in the country with high returns and near perfect credit, typically do not trade at more than two times book value. We believe a one times book value multiple is a generous multiple for the new bank. While the current plan fixed the banks capital issues, we calculate that NPAs will still be almost 6% of assets after the recapitalization. In addition, if we assume the same “normalized” ROA of 0.75%, $8 billion of assets, and 3.4 billion shares outstanding, earnings power would be a mere $0.018 per share (less than two pennies). This equates to 16 times a “normalized” earnings level at our price target (which could be years away). Given the issues at the bank and the disastrous credit, we believe it could be years before PCBC will be allowed to be more aggressive with its capital levels. As a further reference, Gerald Ford has two other large investments in public companies: First Acceptance Corp (NYSE:FAC) and Hilltop Holdings (NYSE:HTH). Both of these investments trade below 1.1 times book value.

Shockingly, the shares are still trading above “current” book value and above where they were just a month ago: when hope still existed that credit would improve and the potential for the company to fall below the “well capitalized” threshold seemed remote. We recognize the inherent value in the rights offering to common shareholders. By our math, should the stock trade at a $990 million market cap after the capital plan, exercising the maximum rights still produces substantial losses (greater than 45% by our estimate).

Disclosure: Short PCBC

Source: PCBC: Large Downside Remains as Shareholders Left With Little

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