So, in my last article I was completely right in predicting that Pacific Capital Bancorp (PCBC) would have a huge spike in delinquent loans in Q1, but the stock is not down much. What gives? Investors are ignoring the danger signs and evaluating the stock solely based on earnings estimates. In this case, earnings guidance is the sirens’ sweet singing luring your ship ever closer to the perilous rocks.
Non-performing loans grew by a staggering 113% in the 1st quarter, from $76.7 million in Q4-07 to $163.7 million in Q1-08. At the same time, the allowance coverage to non-performing loans dropped from 61% to 36%. What is the loss exposure on those delinquent loans? This question was on the minds of several analysts on the conference call. The majority of the non-performing loans are to homebuilders, so the analysts asked about the Loan to Values (LTVs) on the homebuilding loans.
The first analyst to ask the question was from FTN Midwest Research. He asked, “Have all --- has the entire homebuilder portfolio undergone updated appraisals in that whole process? And where do you see those LTVs today, if so?” Management answered about the updated appraisals but did not answer the LTV question. The analyst did not re-ask the question.
The second analyst to ask the question was from Fox-Pitt Kelton. He asked, “With respect to the builder portfolio and some of the updated appraisals, could you give us a sense of where the LTVs are coming in post appraisal for some of the loans that you moved to non-performing status this quarter?” PCBC’s CEO, George Leis, talked about the deterioration in pricing but did not mention the LTVs for these loans. The analyst did not re-ask the question.
Later in the Q & A, another analyst attempted and was finally able to nail them down. The analyst from Sinova Capital asked, “And then on credit, can you provide what your --- the most recent average LTV is on your builder portfolio, both the performing portfolio and the non-performing? " Dave Porter answered, “Yes, the range that we have is around 60-70%”
It sure did sound like Dave was trying to leave it at that! He did not specify performing or non-performing, it just sounded like the answer for both. But thankfully, our pit bull from Sinova Capital later nailed management down: “So then --- okay. So, based on your most recent appraisals, your performing loan construction portfolio has average LTV’s between 60% and 70%?” Porter: “Yes.” Sinova Capital Analyst: “Okay. And how about on the non-performers?” FINALLY admitting to the LTV on non-performing, Porter said: “Well again, obviously much higher on those. We’re looking at --- depending on the individual account, the LTVs could be as high as 100%.”
So let me get this straight: non-performing loans grew by 113% in one quarter and the loss provision coverage shrunk dramatically, and management finally admits that the delinquent home building borrowers have no equity left? LTVs at 100%? Wow! You would think that given the trend in delinquencies and no collateral left on the non-performing home builder loans, that management would at a minimum have greater than 100% loss provision to non-performing loan coverage. This all comes just after management stated on the Q4-07 conference call that: “We have current appraisals on most of the properties, and have applied significant discounts to the existing appraisals on the other properties for the purpose of determining our potential loss exposure. Based on this current analysis, we believe our exposure is relatively modest.” And also: “The remainder of our construction portfolio is performing well. Excluding the non-performing relationships that I just discussed.”
Given all of the management missteps and their evasive maneuvers on the conference call, you might think that PCBC is run by somebody with no banking experience (in case you missed my joke, check out Leis’s employment history).
Disclosure: Author has a short position in PCBC