Holders of more than 1 billion shares of Bank of America stock voted against the election of two of their directors.  1.19 billion ballots were cast against Virgis Colbert, and 1.47 billion were voted against the election of Charles Rossotti. There are slightly more than 10 billion shares outstanding.  About 1.6 billion shares, held by brokers, were not voted.  Colbert holds five directorships: Miller, Lorillard, Stanley Black & Decker, Manitowoc, and B of A.  If you have ever been to New Britain, Connecticut, you will have a lot to say about Stanley Tools.  Rossotti is former commissioner of the IRS, and currently an advisor to the Carlyle Group.  Perhaps voters remember how the Carlyle Group defaulted on 16.6 billion in mortgage-backed securities.  Most were subprime issues owned by a British firm. Its owners include George H.W. Bush and, at one time, the Bin Laden brothers.

I think the price of Pacific Capital‘s common stock should provoke some attention. Although the bank recently agreed to let Gerald Ford buy 225 million shares of common stock at a price of 20 cents per share. Today, the shares are trading for over $2.  Ford also agreed to buy preferred shares.  Maybe the market thinks the deal won’t happen. I don’t see how existing shareholders can stop it, since they have already approved the issuance of new shares.

Jackson Hewitt’s new deal to get an extension on its credit line with Wells Fargo has one problem: it is a subprime loan.  Jackson Hewitt is going to pay LIBOR plus 11 percent on that debt.  Moreover, the loan is written to capitalize interest. JTX only has to pay a portion of their interest due. Of that 11 percent plus, JTX will pay 4.5 percentage points. In all, JTX estimates that debt service will be between $20 and $22 million per year.  Does that smart? Not really. Jackson Hewitt’s operating income for the last four quarters is laughable.  They have lost $230 million from operations.  On top of that, they were only paying about $18.3 million per year in interest.

On Tuesday, BankTalk slammed the recent surge in Pacific Capital shares (see “Is there a Bubble at Pacific Capital?).  Pacific Capital has soared from less than $1 to over $4 this year.  On Wednesday, Pacific Capital shares closed at $4.07.  On Thursday morning, they opened at $1.98, and today they are trading at about $1.85. The game-changing news: Pacific Capital accepted a massive stock-diluting investment from Texas financier Gerald Ford. Ford will now own 91 percent of PCBC, providing that shareholders (including the Treasury Department) approve the sale.

North Carolina slam-dunked the initial round of Census 2010 turnout.  Census reports that 74 percent of North Carolina households returned their form. By the way, the Old North State is in a race with New Jersey to claim a Congressional seat.  Jersey didn’t get out the count, with just 72 percent of households mailing back before the deadline.

I am shocked at the loan volumes in the new HMDA data.  The banks might have been trying to say otherwise, but they really didn’t make a lot of loans in 2009.   Case in point, Bank of America made 3,683 conventional home purchase loans for single-family houses (owner-occupants, first lien) in its hometown in 2008.  In 2009, they made 1072 in Charlotte.  Same town, different bank: Wells/Wachovia made 3,064 such loans in 2008, but just 1,047 in 2009.  Pinch me and tell me the data is wrong!

I’m wondering about how wise it was for Arizona to decide to be so draconian right now.  (I’m also wondering how wise it is, ever.) If your state stands to win or lose hundreds of millions of dollars depending upon how well it can get out a count of its residents, don’t you think you’d want to put off plans to deport them until after Census 2010? Yes, the bill will not go into effect until 90 days after the end of the current legislative session.  Even so, I would imagine that its threat will be felt right away. How receptive are immigrants going to be when a government worker knocks on their door, asking to record who lives at this address?

Thursday will be a telling day to followers of Pacific Capital Bancorp. BankTalk has not been tracking Pacific Capital much in the last few months, as they sold their refund anticipation loan business to Platform Partners in early January.  Absent our gaze, PCBC shares have skyrocketed.  Believe it or not, but PCBC has soared from about $1.20 to over $4 per share.  It is the highest-returning stock in the Russell 3000!

This gain makes no sense.  The performance at the bank has done nothing to justify its returns. Here are few important facts:

• Pacific Capital still has not made a TARP payment.
• Pacific Capital has not addressed its capital ratios.  It has been operating in violation of expectations placed on the bank by the Office of the Comptroller of the Currency and the Federal Reserve for over a year.

Even a quantitative analysis hints that something is not right. PCBC’s Texas Ratio (non-performing assets/tangible equity) is 97 percent.  That means that if all of the non-performing assets had to be written off, that there would be almost not tangible equity left.  RBC developed this metric to predict bank failures. Banks tend to fail when Texas Ratios reach 100 percent.  Hmmm.

PCBC is trading above book value! This means that the market believes that all of those construction loans at PCBC are actually worth more than their outstanding principal balances!

According to Seeking Alpha, the largest investors in Pacific Capital are all index funds and quantitative funds. These are uncommitted buyers.

Pacific Capital will host an earnings call on April 29th.

Let’s review the time line of recent events in the tax refund world:

• November 9th: Pacific Capital releases its quarterly earnings report.  The company does not meet FDIC expectations that it will increase its regulatory capital ratios to the stated minimum.
• December 10th: MetaBank announces that it will increase the scale of its relationship to Jackson Hewitt. They will provide more funding for refund anticipation loans. They will offer a short-term, high-fee line of credit (“the i-advance”) to Jackson Hewitt customers via the i-power card.
• December 20th: Pacific Capital acknowledges that they will not be able to provide RAL funding for Jackson Hewitt. Jackson Hewitt reveals that PCBC had been expected to be the source of 75 percent of its tax refund capital for the 2010 tax season.
• December 24th: The OCC releases news of its decision that Pacific Capital must exit the tax refund business.
• December 30th: Jackson Hewitt and Republic announce a new agreement that will link Republic Bank’s capital to additional franchises.
• December 30th: Republic reports that it will have a meeting with the FDIC to discuss the status of their refund anticipation loan business beyond the 2010 tax season.  The meeting is scheduled for sometime during February.
• December 30th: Pacific Capital releases an internal memo to tax preparers and transmitters. In the letter, they indicate that they will reorganize their RAL business to a private LLC – Santa Barbara Tax Products Group (SB). SB will have the same employees, the same facility, the same “hardware and processes.”  SB reports that it is making arrangements to get funding with a “new bank.”
• January 4th, 2010:  H&R Block announces that the IRS will allow tax filers to access W-2s by January 15th, provided that they utilize an online system.  In previous years, employers had until Feb. 1 to release W-2s.  Accordingly, tax prep season did not get underway in full until the end of January.

The news that Pacific Capital is trying to stage a run around of the OCC’s directive should stir up some attention. Indeed, it was less than a week prior that the OCC ordered PCBC to exit tax refund loans.  The bank had indicated that they would sell the tax division to a private equity firm.

Upon announcing the OCC directive, the folks at PCBC appeared to be contrite. George Leis comments that the new rule will allow PCBC to focus on its roots of “being a pure community bank.”

Huh? If they wanted to be a community bank, why did they wait until the OCC stepped in?  Ah, but when a banker talks, check it out: in reality, Pacific Capital is using chicanery to preserve its participation in RALs.

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.