Pacific Capital Bancorp (PCBC)

[Enterprising Investor]

Wager on Distressed Bank Pays Off (3/12/12)

An Investor Reaps Windfall in Deal for Pacific Capital

By ROBIN SIDEL

It took Texas billionaire Gerald J. Ford two years to find a distressed bank that he wanted to pump money into—and two more years to roughly triple his investment.

Mr. Ford, who has been buying and selling distressed banks since the 1980s, scored a big win Monday with an agreement to sell Pacific Capital Bancorp to a unit of Mitsubishi UFJ Financial Group Inc. for $1.5 billion.

In 2010, Mr. Ford shored up the Santa Barbara, Calif., lender with an infusion of $500 million. "It's bittersweet because this is probably the best bank we've ever had," Mr. Ford said.

The deal expands the presence of Japan's largest bank in California, where it already ranks fourth in deposits, according to the Federal Deposit Insurance Corp. MUFG owns UnionBanCal Corp., which has $90 billion in assets. Its main banking unit operates 414 branches in California, Washington, Oregon, Texas and New York.

MUFG also owns about a 22% stake in Morgan Stanley .

Pacific Capital is far smaller, with $5.9 billion in assets, and is the parent of Santa Barbara Bank & Trust. The bank has 47 branches on California's central coast.

News of the deal sent Pacific Capital shares up 57%, or $16.34, to $45.03 in Nasdaq Stock Market trading Monday.

The agreement marks a rare victory for the scores of investors and private-equity firms that poured billions of dollars into battered financial institutions in the past couple of years. Many of those deals have stumbled, leaving buyers underwater on their investments and unsure if they will ever cash out at a profit.

"It often takes years to rehabilitate one of these banks," said Gregory Lyons, co-chairman of the financial-institutions group at law firm Debevoise & Plimpton LLP in New York.

He noted that Mr. Ford's success is due partly to the fact that he is willing to sell Pacific Capital now. Other investors usually want to rehabilitate their institution, make acquisitions and then sell when the banks are bigger.

Although many banks have resolved troubled loan portfolios that contributed to their losses during the financial crisis, they are now struggling with higher regulatory costs, low interest rates, and a lack of robust loan growth. That means profits are likely to stay under pressure.

Mr. Ford's payday comes two months after BankUnited Inc., based in Miami Lakes, Fla., abruptly abandoned a plan to sell itself after receiving offers that were lower than expected. Although the private-equity firms that revived the failed Florida lender in 2009 earned hundreds of millions of dollars by taking it public, the lack of interested buyers was widely viewed as a setback. Shares of BankUnited closed Monday at $23.58, up 20 cents, on the New York Stock Exchange, below the $27 price where they went public in January 2011.

Also, last fall, New York real-estate developer Stephen Ross returned $1.1 billion to some 150 investors, saying that he hadn't found attractive deals in the banking industry.

Mr. Ford, 67 years old, rose to prominence during the savings-and-loan crisis of the 1980s. He teamed up with New York financier Ronald Perelman to buy five failed Texas thrifts, which were overhauled and merged into Golden State Bancorp. Citigroup then bought the bank for $5.3 billion in 2002.

Mr. Ford moved more slowly during the latest financial crisis, earning some criticism from his peers. Although regulators granted him a license in 2008 to buy a bank, he stood by as private-equity firms snapped up high-profile deals like BankUnited and California's IndyMac Bank. He later said that he made a mistake by not bidding on them.

And when he did set his eye on failed banks, like Downey Financial Corp. of Newport Beach, Calif., and Guaranty Bank of Austin, Tex., he lost out to other bidders.

In 2010, Mr. Ford finally alighted on Pacific Capital. Like other California lenders, it was loaded down with soured commercial and residential real-estate loans. It didn't fail, although many industry analysts thought its days were numbered.

Mr. Ford pumped $500 million into Pacific Capital through a subsidiary of his Ford Financial Fund L.P., receiving a 91% stake in the lender and two board seats. Shareholders were virtually wiped out in the deal, although they were given a right to buy stock at 20 cents a share.

"No doubt there's a lot of risk in this deal," Mr. Ford told The Wall Street Journal at the time.

As part of the deal, the federal government, which had invested $181 million in the bank in 2008 under the Troubled Asset Relief Program, agreed to swap its preferred shares for common stock. As a result it was left with a 7% stake.

The deal returned the bank to profitability. It earned $70 million last year.

"Our guys did a great job in managing the problems faster than I would have imagined," Mr. Ford said. He said representatives of MUFG first approached the bank about a deal in late December. Talks intensified last month.

Mr. Ford's bumper profit is a good sign according to Paul Murphy, chief executive of Cadence Bancorp LLC, a Houston-based bank holding company that has bought a number of community banks. Last week, Cadence agreed to buy Encore Bancshares Inc. of Houston for $250 million.

"This validates the whole distressed bank-investing model. If you can fix them up and run them right, they can have a very attractive return for shareholders," Mr. Murphy said.

Mr. Ford, meanwhile, is thinking about his next deal.

"I don't think we will turn around and find another one tomorrow, but I suspect in the next year or so we will find something to do," he said.

Write to Robin Sidel at [e-mail]

http://online.wsj.com/article/SB10001424052702303717304577277280087592456.html?KEYWORDS=wager+on+distressed+bank