Pacific Capital Bancorp faces a fork in the road: Go it alone or find a stronger partner.

Shareholders passed two proposals Sept. 29 that would let the parent of Santa Barbara Bank & Trust and several other tri-county banking brands go either way. The question now is what each path would hold.

What’s not in question is that the bank needs capital and that another big loss like the $362 million one in the second quarter could put it at serious risk. The bank voluntarily agreed to boost its tier one leverage ratio — its free cash divided by its loans and other assets — to 9 percent by Sept. 30.

The bank is still considered well capitalized, but since it made that agreement in April its ratio has moved in the wrong direction, falling to 5.7 percent June 30.

That means it either needs to go it alone and get cash from investors or find a partner with strong capital reserves. Here’s a look at what each option might hold.

Raising capital

About 59 percent of shareholders voted to give Pacific Capital’s board the power to issue up to 500 million shares of the firm’s stock, up from the current authorized limit of 100 million. If created, those shares could be sold to raise money.

Being able to issue enough shares is crucial, said Julianna Balicka, an analyst with Keefe, Bruyette & Woods.

She gave the example of Hawaii-based Central Pacific Bank. That firm put a $100 million stock sale on hold in late July because its board hadn’t authorized the issue of enough new shares. The Hawaiian firm couldn’t get the share price it needed to make the deal work.

“To authorize the right amount of share issues is the first step in getting a capital raise done,” Balicka told the Business Times in an interview. She said Pacific Capital seems to have taken to heart what happened to Central Pacific and guarded against it. “They’ve done their homework,” she said.

On the other hand, authorizing the potential issue of a big slug of new shares could be viewed as a poison pill – that is, a weapon to discourage potential hostile buyers. Pacific Capital’s board would have the power to massively dilute a buyer’s stake.

But neither the new shares nor the other measure approved, a reverse stock split, which could bolster share prices by reducing the overall number of shares on the market, are guaranteed to happen.

“These are additional tools in the toolbox as the board looks at strategic alternatives,” said Debbie Whiteley, executive vice president of investor relations and corporate communications at Pacific Capital.

A merger

Pacific Capital hasn’t ruled out a merger with another bank. In July, it brought aboard investment bank Sandler O’Neill to help it evaluate “strategic alternatives.”

The question is who might buy Pacific Capital and under what terms. Despite its battered stock price – shares have fallen from near $20 a year ago to below $2 now – the brand is probably worth more than what the stock is trading for right now.

“There aren’t too many banks that have a significant footprint in the region,” said Balicka, the analyst. “[Pacific Capital] is it for the Central Coast.”

But a buyer would be getting a lot more than signage, Balicka said. Pacific Capital’s deposit base, at $4.1 billion June 30, still dwarfs those of smaller competitors in the region.

“Their trust business is also a very good line that they’ve had for a number of years,” Balicka said. “Buying [Pacific Capital] won’t just be expanding a footprint. It’ll be the strategic adding of lines of business to an operation.”

Balicka isn’t ready to name potential buyers. But a tool provided by the Federal Reserve Bank of St. Louis illuminates three possible candidates: Minneapolis-based U.S. Bank, Salt Lake City-based Zions Bancorporation and San Francisco-based Union Bank.

All three banks declined to comment on whether they’re exploring a merger with Pacific Capital. But a quick analysis with the St. Louis Fed’s tool showed that a merger with any of them wouldn’t trip off anti-trust problems, though Union Bank might have a slight concentration issue in Lompoc and Solvang.

At one point, U.S. Bank held nearly 5 percent ownership in Pacific Capital. The nation’s fourth largest banking company by assets, U.S. Bank in June got the go-head to pay back the $6.6 billion in TARP, or Troubled Asset Relief Program, money that it got from the federal government after successfully raising capital to pay it off.

Pacific Capital, by contrast, got $180 million in TARP funds. In June it suspended dividend payments on that money.

U.S. Bank has a strong presence in the Los Angeles market, with more than 200 branches, but is a smaller player in the Tri-Counties, with 13 branches in the Oxnard-Thousand Oaks area, one branch in Santa Barbara, one branch in Santa Maria and six branches in the San Luis Obispo market. Some of those branches are small operations in grocery stores; Pacific Capital would offer it dozens of new branches from Westlake Village to Monterey.

Zions of Utah is another potential player. The $52-billion-asset firm has an active California operation in its San Diego-based California Bank & Trust, a $10 billion bank.

California Bank & Trust has a history of scooping up troubled banks. In February, it worked with federal regulators to take over Culver City-based Alliance Bank, a $1 billion firm.

Zions also has an Internet banking business and a payments company, an emphasis on technology that could help Pacific Capital smooth out some of its back-end issues. Pacific Capital has taken on several technology platforms as it has made acquisitions over the years, and bank officials have said they believe they could squeeze $55 million in savings driven in part by harmonizing those platforms.

But there are problems: One of Zion’s capital measures, tier one risk-based capital, took a big hit in the second quarter because the bank had to downgrade some investments. On the other hand, Zions recently raised $450 million by selling debt.

Union Bank said Sept. 25 that it got a $2 billion capital infusion from its Japanese parent firm. The money was ostensibly for credit losses, but if those losses come in lower than expected, Union Bank “will have considerable excess capital that could be deployed to support incremental organic growth and acquisitions,” Chief Executive Officer Masaaki Tanaka said in a release.

To merge with Pacific Capital, Union Bank might have to sell off single branches in Lompoc and Solvang to appease anti-trust regulators. But it would be a small price to pay: Union Bank’s strong footprint on the California coast has a big gap between Ventura County and northern Santa Barbara County, and Pacific Capital’s branches would fill it.

Balicka, the analyst, said it might be too soon to talk about a merger. There’s been no disclosure of any order from federal regulators to raise capital ratios.

And a series of proposed class-action lawsuits by shareholders might be a barrier to a deal.

If Pacific Capital’s third-quarter results, expected in about a month, show that a turnaround is in the offing, Balicka said, takeover talk could turn out to be much ado about nothing.

“While the idea of [Pacific Capital] being taken over is very trendy,” Balicka said, “perhaps they will have enough time.”

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