Pacific Capital Bancorp's new chief financial officer says the Santa Barbara, Calif., company needs a more sophisticated finance department to better manage its growing pains.
To that end, Joyce Clinton, who was the CFO of Wells Fargo & Co.'s technology and operations division before joining Pacific Capital in March, has hired a senior business systems analyst and created five positions in budgeting and forecasting.
Ms. Clinton said these moves will help the $7.2 billion-asset Pacific Capital get a firmer grip on expenses, which have soared in recent years as it entered new business lines and acquired banks. In June the company issued a profit warning for the second quarter.
Ms. Clinton told American Banker on Wednesday that she will announce her department's cost-cutting initiatives during Pacific Capital's July 27 earnings conference call with analysts and investors.
"We have all the right things going for us, but we definitely need to discuss strategy for optimizing the balance sheet and driving the efficiency rate down," she said. The revamped finance department will be modeled after Wells Fargo's, she said.
Subtracting the operations for its seasonal - and highly profitable - tax refund anticipation loan business, Pacific Capital Bank's efficiency ratio was 67.97% as of March 31, well above the average of 56.39% for commercial banks nationwide with assets between $1 billion and $10 billion, according to the Federal Deposit Insurance Corp.
Since 2004, Pacific Capital has bought two banking companies, including the $592 million-asset Pacific Crest Capital Inc. in Agoura Hills, Calif., that have extended its reach north to San Jose and south through San Diego. They have also expanded its business lines, particularly in Small Business Administration lending.
But double-digit loan growth has been accompanied by huge expenses as the company has beefed up back-office support to handle the growth. Additionally, the conversion of the various information technology systems of recent and earlier acquisitions has taken longer than planned, and complying with the Section 404 internal-controls requirements of the Sarbanes-Oxley Act has cost more than expected.
Pacific Capital has generally been very profitable, thanks to a great extent to its refund loan business. Pretax income from such loans rose 29.3% in the first quarter, helping overall earnings for the period rise 13.4%, to $67.4 million. At the end of 2005 (which included the three quarters not skewed by the seasonal refund loan business), its bank's returns on assets and equity, respectively, were 2.59% and 18.55%, above its peers nationwide.
Still, Pacific Capital announced on June 26 that it expected to report second-quarter earnings of 20 to 22 cents a share, well below the average analyst forecast of 34 cents. The company has had to resort to wholesale borrowing to fund loan demand, creating additional margin pressure, and has said expenses from its protracted IT conversion process and compliance with Section 404 will be higher than it expected.
Pacific Capital also said it expects 2006 earnings per share to range from$2.15 to $2.20. Its earlier guidance was $2.29 to $2.37, and analysts had expected $2.35.
Ms. Clinton, who had been with Wells since 1996, said it was too soon to detail her strategic initiatives. But she noted that she has already hired a senior business systems analyst to manage some of the projects she will unveil on July 27.
She is also looking to fill a newly created position - director of finance, in charge of budgeting and forecasting - and has promoted four to group finance officer to oversee budgeting and forecasting within each business line.
Ms. Clinton has replaced Pacific Capital's treasurer, who retired this spring, and is seeking a new controller. The current one, Charles T. Osberg, announced Wednesday that he is resigning Aug. 11 to take a position at another local community bank.
Brett Rabatin, an analyst at First Horizon National Corp.'s FTN Midwest Securities Research Corp. in Nashville, called Ms. Clinton's restructuring "a big positive" for a company that has become more complex.
Whether her initiatives will improve earnings anytime soon is "a good question and something the Street is eagerly waiting for," Mr. Rabatin said. "If they can get control of their expenses" and predict expenses more accurately, "that'll give the Street more comfort with the direction they're headed," he said.
Pacific Capital's stock is down 11% since June 23 (the last business day before its profit warning) and nearly 17% since June 1. It was trading at $29.58 late Thursday.
Todd Hagerman, an analyst with Swiss Reinsurance Co.'s Fox-Pitt, Kelton Inc. in New York, said he expects Pacific Capital's expenses to remain high for the foreseeable future and earnings to remain under pressure as a result - "particularly since they're creating new positions and enhancing back-office functions."
Ms. Clinton said that though creating senior-level positions seems expensive, her new strategic initiatives should reduce overall expenses.
