Mainstream tax prep customers will be less likely to use a refund anticipation loan this year, an outcome that reflects a new awareness by regulators at the Office of the Comptroller of the Currency. Perhaps it was meant to stay under the public radar, or maybe it was just a gift to the consumer advocates that have fought this battle, but PCBC announced the OCC’s instruction on Christmas Eve in a short 8-K.

This is very good news.  Pacific Capital, a Santa Barbara bank that operates Santa Barbara Bank & Trust, announced in a filing on December 24th that the OCC had asked it to cease its tax refund business. I get a kick out of how the people at Pacific Capital tried to spin this event:

• “It will help return Pacific Capital Bancorp to its roots of being a pure community bank….” George Leis, CEO
• “The tax refund loan business is a sort of niche business that falls outside of what would be considered core banking operations…” Tony Rossi, spokesman, PCBC

This spells big trouble for Jackson Hewitt, a national tax prep chain that was counting on Pacific Capital to fund at least part of its RAL activity in the upcoming tax season. Jackson Hewitt shares immediately fell by 25 percent. JTX has made some plans for alternative partnerships with Iowa’s MetaBank.  However, MetaBank is a small institution. It can fund RALs, and it will provide a loan product in tandem with any RALs that Jackson Hewitt offers, but it cannot replace Pacific Capital.

The OCC had meetings with advocates in December about the ongoing RAL program at PCBC.

Not all good news

This would be a great victory for consumers, except that it is not. Pacific Capital is going to sell its tax refund business. A few stories indicate that the new owner will be a private equity firm.  Pacific Capital released an announcement to that effect, promising that the sale would go through within one week.  This is incredibly problematic. Moving to a private equity framework will mean that there is even less supervision of this activity.  The OCC had an ability to put a stop to RALs at PCBC. No one except the private equity firm’s investors will have a say about what happens to the business if this sale goes through.

Jackson Hewitt’s expanded partnership with MetaBank, a small thrift in Storm Lake, Iowa, adds one name to the short list of banks that provide liquidity to national tax prep chains for their refund anticipation loans. But, what or who is MetaBank?

• MetaBank has $652 million in deposits, with 13 branches, in two states (Iowa and South Dakota)
• MetaBank has faced two enforcement orders since 2001 from its primary regulator, the Office of Thrift Supervision. The most recent, in June of 2009, involved an employee who absconded with $4 million in deposits.
• MetaBank received a satisfactory for its last Community Reinvestment Act exam in 2007.
• MetaBank has less than $1 billion in assets. As an intermediate small institution, it will not have another exam until 2011.
• MetaBank made two mortgage loans to low-income borrowers in 2007, and only 5 to moderate income borrowers.
• The bank made three loans to borrowers in low-income census tracts in 2007. In the period from 2005 to 2007, MetaBank made a total of 5 mortgage loans to borrowers in low-income census tracts.
• Low-and-moderate income census tracts make up 25.2 percent of census tracts (with 20.8 percent of housing units) in the four MSAs where the OTS examines MetaBank. Only 7.5 percent of mortgage loans made by MetaBank went to borrowers in low-and-moderate income census tracts. Median family incomes for census tracts in those MSAs are such that a moderate income is less than $54,160.
• MetaBank made two qualified Community Development investments, both in bonds to Urbandale, Iowa for economic development. Each bond was for $95,000.  The bank made about $31,000 in donations to local community organizations.
• The bank claimed that a fair amount of small business lending should qualify as a community development loan – with 87 small business loans and 330 small farm loans in low and moderate income census tracts. The bank did not report any community development activity in three of its four assessment areas.  The OTS said that it had a “good record,” of community development lending, but “poor responsiveness” to community development needs.  Odd.

This information is relevant for groups that want to work with MetaBank.  The institution is going to be (more…)

Pacific Capital’s share price soared on Friday, creating a pattern that should provoke some questions.

Pacific Capital, a small bank headquartered in Santa Barbara, California, jumped 48 percent on Friday, from 87 cents per share to $1.29. It was the largest jump since November 23, when share prices finished at $1.25.  That wrapped up a dramatic week, when share prices increase 86.5 percent over four days.  That has turned out to be fleeting gain.  This morning, Pacific Capital’s shares dropped 28 percent in the first 19 minutes of trading.

Both weeks have one thing in common – the expiration date for equity.  This is a link to the calendar of options expirations in 2009.  This link provides a good explanation of how options work.  Equity options end after the third week of the month.  Traders close out positions over the weekend, meaning that option positions are either in or out of the money at Friday’s close.

Here is one scenario of how a trader might make money on options for his or her financial institution.  An options trader could sell puts or buy calls.  Buyers of puts would expect that share price to drop.  These instruments hold two kinds of value – intrinsic and time.  The intrinsic value is the difference in the contract price (i.e. $2.50) and the current market price.  The time value is based on an estimate of the expected value of the remaining time.

A holder of a $2.50 put in PCBC was sitting pretty last week -  each put would have been worth about $1.75 on Thursday when the shares were at 86 cents with one day to go.  That value evaporated on Friday, though, as puts ultimately exchanged at $1.08.  The same kind of change could happen on the call side.

Traders could make money two ways in that scenario.  For one, he or she would make a transactional profit on selling puts or calls.  Demand for puts and calls increases with volatility.  Second, there would be money to be made on the change in value of options.  Those $2.50 puts, for instance, sold at $1.50 or more for much of the month.

It takes some wealth for one institution to change the price of a stock.  That said, it is much easier with a small company.  If the hypothetical trader was working for an institution with substantial wealth, it would be possible.  That options trader could work with the equity traders.  The buyer would have to keep on buying, but the “buy” would be relatively little.  The 7.6 million shares transacted in PCBC on Friday probably cost less than $10 million overall.  The ability to change the price in equity is not something that most investor have, but it is well within the reach of corporate or institutional investors.

The buying institution would take some risk, of course, that they would be buying shares at an elevated price.  The only escape, of course, would be to dump the newly acquired shares while the price was still high.  That is exactly what is happening this morning. The shares have given away almost half their gains, on a volume that has exceeded PCBC’s daily average volume before noon.

I cannot track this next bit of information, but traders were reporting that a single block trade of 2.1 million shares went in just before close of trading on Friday.  As well, three trades accounted for 35 percent of all volume in PCBC.

Why this Matters

There are several reasons why these fluctuations matter, and those reasons reach into the interests of several different parties.  First and foremost, Pacific Capital is a victim in this scenario.  Their share price matters as they struggle to raise regulatory capital.

Pacific Capital’s deposits are also at risk.  The fluctuation in equity price influences regulatory capital. Pacific Capital is already undercapitalized. With manipulation, that basis is vulnerable.  If the equity is threatened, it enhances the prospect that the bank will be taken over.  While the holders of guaranteed deposits would be made whole by the FDIC, it is taxpayers that are ultimately on the hook for that outcome.  The fancy of traders is our loss.

These are dramatic swings for a small company such as  Pacific Capital.  It has about $52 million in market capitalization.  In this arena, a large trader (s) could easily use market size to influence short-term prices.  That is what could be happening.  On Friday, about 7.6 million PCBC shares were traded.  That is a very high volume.  (more…)

For-profit schools are gaining “market share,” and as they do it brings changes to some of the fundamental aspects of college attendance.  These schools often serve non-traditional students, because they are adept at bringing school to these students.  Their campuses usually have parking so that people can get to class quickly.  They have classes at night.  Their online distance courses go one step further, making it possible for busy adults to attend school while working around a job and family responsibilities. These factors explain why the largest post-secondary institution, as measured by student population, is the University of Phoenix.

These schools depend on external funding to pay tuition. That funding comes largely through a combination of (more…)

MetaBank has stepped in to fill the void that might be created if Pacific Capital (Santa Barbara Bank & Trust) is no longer able to fund refund anticipation loans (RALs).

This is a development with two main impacts.  First, it guarantees that financial problems at Pacific Capital will not prevent Jackson Hewitt from offering refund anticipation loans this year.  Second, it provides a line of credit to refund anticipation loans with high interest rates.  The rates, by MetaBank’s own calculation, are 150 percent APR.

In a brief reference on their latest 10-K, MetaBank makes reference to a pilot program that began this spring to fund RALs for “a major tax preparation firm.”

During fiscal 2009 the Bank participated in tax refund anticipation loans with a major tax preparation firm after participating in a test program with that firm in fiscal 2008.

The major tax preparer is Jackson Hewitt (JTX).  Jackson Hewitt, it turns out, was not going to be left holding (more…)