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.

Just listening to Tuesday’s investor call with Pacific Capital Bancorp’s (PCBC), following on their quarterly filing.

• Bad loan to deposit ratio is 97 percent
• $200 million in new brokered deposits.
• tier one – below 9 percent
• total risk-based capital ratio is below regulator requirements
• $8.9 million impairment on investments on lihtc projects, or sometimes referred to as CRA investments. $2.7 million in fdic insurance.
• net interest margin drops 60 basis points.  Invested in low-yielding assets in order to get liquidity, according to CFO Stephen Masterson.  Pacific Capital CEO George Leis says that liquidity is good, but of course, it is thwarting net interest margin.

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In the next year, look for H&R Block (HRB)to pulverize its competition for retail tax prep.  Fundamental changes, going on this week, will impact the tax prep marketplace.  It will be one of those disruptive events that should make winners  out of Block, and losers out of Liberty Tax Service and Jackson Hewitt.

The unknown is how JP Morgan will respond.  They are already in the RAL business with a lot of the independents.  Even so, tax season is about two months off.  Can they come to terms with Jackson Hewitt and Liberty Tax?  Can they reach an agreement in time for this year’s tax season?

How RALs Drive Tax Prep Services

The tax prep chains draw in customers based on two things: the quality of their tax prep service, and the availability of advances on expected tax refunds.   In today’s market, tax prepares must provide loans, or really 9 day advances – on tax refunds.  For the kind of consumers that flock to strip-mall tax places, that refund is the payola of the year.  It can often be as much as $2,000 for a family making approximately $40,000 per year.

Refund anticipation loans are a sizeable chunk of income for tax prep chains.  The chains take about 10 percent of the (more…)

A lot of people are wondering what is about to happen to Pacific Capital.  Since the beginning of the year, PCBC has slowly, but steadily, marched downhill.   The shares entered 2009 at $17.  Today, they closed at $1.44.

The future is not clear, though.  PCBC may be acquired by another bank.  The FDIC might intervene.  It is hard to know, although the decline in the share price suggests that investors are dubious about the bank’s prospects.  Analysts have talked about selling off the refund anticipation loan (RALs) business.  That is an interesting question – and something that I would like to consider today.

As bad as things are right now, it could get worse.  For one, PCBC may lose some of its ability to shelter (more…)

Pacific Capital Bancorp (PCBC) is about to face the music.  In the next several days, significant events may occur that shape the future of PCBC as a going concern.

Shareholders will vote on two questions at the bank’s meeting tomorrow.  First, they will have the chance to weigh in on these questions:

• raise the number of authorized shares from 100 million to 500 million.
• effect a stock split of at least three-to-one and as much as ten-to-one, with a reduction in shares by a complementary proportion

The reverse stock split might be nothing more than window dressing.  Some hold that a share price below $10 (more…)