Hard to Make Bank in Santa Barbara, eh?

Pacific Capital Bancorp uses its tax refund business to offset its poor performance in wealth management and community banking.

That should tell you something about how much confidence a person ought to have in their management.  Remember, Pacific Capital Bancorp is located in Santa Barbara, California.  That’s a pretty nice address.  There are a lot of deposits in that neighborhood.

In spite of the advantages that would be conferred upon a bank that serves the rich – lots of fee income from wealth management, access to plenty of deposits, and  plenty of demand for financial services – well, PCBC can’t seem to find a way to do it in Santa Barbara.

In the last quarter (first three months of ’09), Pacific Capital lost about $5.5 million.  Their performance was worse in its regular banking operations: they lost $70.1 million in wealth management.  How do you lose money on the steady stream of fees from wealth management?

What’s odd is where they picked up their income: not from Santa Barbara’s elite, but from the backs of the poor.  Across the country, many low-income families go to tax prep providers like Jackson Hewitt and Liberty Tax.  Eager to get their refund from the EITC, they apply for a short term loan – a refund anticipation loan or its neighbor, the refund anticipation check.

Pacific Capital is the financier of these lines of business.  In the first quarter of ’09, that work netted PCBC more than $51 million. Without that RAL/RT funding, PCBC would have lost more than $66 million in the first three months of the year — almost a million dollars per day.

The Federal Government Comes to the Rescue

Treasury helps to make this bank sap the assets of the poor.  PCBC got $180.6 million last fall.  PCBC says the money helps with their capital ratios.  True enough, they need that kind of help.  Although Pacific Capital is next door to a lot of money, they currently have imported about $1.28 billion in deposits through brokered CDs. They need those funds because they can’t find any takers for their RAL loans.  Those assets are poison right now.  No one will buy them, so the RALs just sit on their books.  PCBC took a charge of $82 million on their RALs just this quarter.

Some have said that the government should have exercised more due diligence regarding the financial health of Pacific Capital.  Indeed, PCBC announced Monday that they won’t be able to make their scheduled TARP dividend payment.

Why, why….