The Company is a community bank holding company providing full service banking including all aspects of consumer and commercial lending, trust and investment advisory services and other consumer and business banking products through its subsidiaries’ retail branches, commercial and wealth management centers and other distribution channels to consumers and businesses primarily located in the central coast of California. The Company was one of three primary providers nationwide of RALs and RTs at December 31, 2009. On January 14, 2010, the Company sold all of the assets of the RAL and RT Programs segment.
The Company has six wholly-owned subsidiaries. Pacific Capital Bank, National Association (“the Bank” or “PCBNA”), a banking subsidiary, PCB Service Corporation, utilized as a trustee of deeds of trust in which PCBNA is the beneficiary and four unconsolidated subsidiaries used as business trusts in connection with issuance of trust-preferred securities as described in Note 14, “Long-term Debt and Other Borrowings” on page 144 of this Form 10-K.
PCBNA has three wholly-owned consolidated subsidiaries:
Morton Capital Management (“MCM”) and R.E. Wacker Associates, Inc. (“REWA”), two registered investment advisors that provide investment advisory services to individuals, foundations, retirement plans and select institutional clients.
SBBT RAL Funding Corp. which was utilized as part of the financing of the RAL program.
The Company had three reportable operating segments at December 31, 2009. These segments are determined based on product line and the types of customers serviced. These reportable operating segments are Community Banking, CWMG and RAL and RT Programs. The CWMG segment is the result of combining two segments that were reported separately in the 2008 Annual Report on Form 10-K. For purposes of the segment reporting in Note 24, “Segments” to the Consolidated Financial Statements, the two segments have been combined for the years ended December 31, 2008 and 2007 as if the segments had been combined as of January 1, 2007.
The Community Banking and CWMG segments represent the traditional banking operations of the Company and are referred to as the “Core Bank” by Management. The banking operations of the Core Bank are similar to the operations of other banks. The RAL and RT Programs segment is highly seasonal as a majority of the income is earned in the first quarter of each year. The RAL product generates interest income and the RT product generates non-interest income. The Company experienced significant growth in the RAL and RT Programs over the last several years but also had a high amount of credit, reputation and regulatory risk. In an effort to reduce the Company’s risk, the Company sold the RAL and RT Program segment on January 14, 2010. The financial impact of the RAL and RT Programs will be discussed throughout the Management Discussion and Analysis (“MD&A”) section of this document and in Note 7, “RAL and RT Programs” of the Consolidated Financial Statements.
The income generated by these two Core Bank reportable segments is driven by the lending and trust and investment advisory products offered to customers. The primary expenses are interest expense on deposits and funding costs and personnel. Deposit products are provided to the customers of the Community Banking and CWMG segments.
Business units in this segment provide residential real estate loans, home equity lines and loans, consumer loans, small business loans, deposit products, Small Business Administration (“SBA”) loans and lines, and demand deposit overdraft protection products.
Residential real estate loans consist of first and second mortgage loans secured by trust deeds on one to four unit single family homes. The Company has specific underwriting and pricing guidelines based on the credit worthiness of the borrower and the value of the collateral, including credit score, debt-to-income ratio of the borrower and loan-to-value ratio. In the third quarter of 2008, residential loans began to be originated for sale on a flow basis in addition to booking loans held on the balance sheet. In the second half of 2009, the Company made a strategic decision to only originate loans to be sold into the secondary market.
Commercial and Wealth Management Group
In January 2009 the Commercial Banking and Wealth Management segments were combined into one segment. The new CWMG segment provides the same products and services that were offered prior to being combined, but the combined segment is serving the same customers under one business model.
A majority of the customers served in this segment are middle market companies with business owners who are high net-worth individuals. Combining the segments allows the Bank to serve these customers with one relationship manager. This segment offers a complete line of commercial and industrial and commercial real estate secured loan products and services as well as trust and investment advisory services and private banking lending, deposit services and securities brokerages services through the Bank’s trust and investment management group and through MCM and REWA. The types of products offered in this segment include traditional commercial and industrial and commercial real estate and lines of credit, letters of credit, asset-based lending, foreign exchange services and treasury management. The loan products also include construction loans for commercial and residential development, land acquisition and development loans, secured and unsecured lines of credit and financing arrangements for completed structures.
RAL and RT Programs
RALs are a seasonal credit product extended to consumers during the first four months of each calendar year. The purpose of a RAL is to provide consumers with liquidity at the time they file for their tax refund. The Company works with third party tax preparers who facilitate the origination of RALs through an application process. RAL underwriting is based on borrower information as well as certain criteria within the tax return. The source of repayment for the RAL is the Internal Revenue Service (“IRS”).