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The Twilight of RALs at Pacific Capital

Adam Rust's picture

Posted November 4, 2009

Yesterday's earnings report at Pacific Capital was, at best, a mixed bag.  Pacific Capital lost 87 cents per share.  They were expected to lose 80 cents per share, but then again, last quarter they lost $7.77 per share, so maybe it is a vast improvement.

CEO George Leis was optimistic about their quarter.

"The aggressive approach we took earlier in 2009 towards resolving our problem loans helped drive a substantial decline in our credit costs, particularly in the construction and land portfolio, said Leis in a prepared release.  "While our credit costs still remain elevated above historical levels, we are encouraged by the moderation we experienced in the third quarter."

Gee, that's swell.  Lose $41 million, call it encouraging.

This earnings report should concern shareholders not just at Pacific Capital, but also franchise owners and shareholders at their RAL partners, Jackson Hewitt and Liberty Tax Service.

Unusual Accounting

The problem for PCBC is that they don't have much more room for more losses.  Shareholder equity is now just $397

Handy Fact Sheet on Refund Anticipation Loans

Adam Rust's picture

Posted October 14, 2009

5.8 million – RALs made by the three largest RAL providers in TY 2006:

  • Jackson Hewitt – 1.3 million
  • Liberty Tax Service – 0.3 million
  • H&R Block – 4.0 million

Corporate investors: Pacific Capital Bancorp, Republic Bank & Trust, JP Morgan Chase Bank, River City, and HSBC.

8.67 million: Number of RALs originated in TY 2007:

$901 million:  Fees on RALs originated during that year.

$336 million: Additional money spent by taxpayers on the new refund anticipation check product.

Three to Nine Days: time saved by getting a RAL, as opposed to using IRS e-file service.

Pacific Capital Back in the Hot Seat

Adam Rust's picture

Posted September 14, 2009

Pacific Capital Bank, the small California bank with big problems, has earned some national recognition this week. Granted, its not good recognition, but, well, what do you expect?

Two-time Pulitizer Prize winning reporters Jim Steele and Donald Bartlett (America: What Went Wrong) have contributed an analysis of the the TARP program for the October issue of Vanity Fair (linked).  They briefly draw on the short-sighted nature of the management of the TARP program, and then drill down to examine some of the curious follies exhibited by some of the recipients of the program.

The first bank profiled is none other than Pacific Capital. Bartlett and Steele pillory TARP's lack of due diligence in

Pacific Capital Buys RALs, Can't Pay its TARP Dividends

Adam Rust's picture

Posted June 23, 2009

Pacific Capital Bancorp reminds me of that difficult family member that keeps on finding new ways to create problems.

This week, the news is that Pacific Capital is one of three banks that has announced that it will not be able to make its TARP dividend payment to the Treasury Department. Pacific Capital (PCBC) received $180.6 million last fall. It is a bad sign about the financial health of a bank that routinely pushes bad financial products on poor consumers.

Get a RAL, Get Taken

Adam R.'s picture

Posted May 6, 2009

Often, people pass off the seeming lack of logic concerning the use of refund anticipation loans as evidence that the poor make poor decisions, or that they fail to understand the time value of money.

When described by academics, there's even a name for people who exhibit this kind of decision-making: they are individuals with a "high discount rate."  What this means is that the poor, in this example, value money in the present greatly.  They would take a dollar today over a much higher amount in the future.

The price of a RAL, where an APR can be over 200 percent, infers a very high discount rate.  We are talking about people who might take $1500 tomorrow (you have to wait one day to get your refund with a RAL), rather than waiting to get $1700 in about ten days.

I think the mechanics of a RAL tell us that this academic description of how the poor are making decisions is a little bit off the mark.

Borrowers who get RALs avoid paying for their tax preparation services out of pocket. It might cost them $150 otherwise to get taxes done at one of the mainstream franchise tax prep services. That can be a lot of money to a person trying to support a household on a minimum wage salary.

Here's how the conversation might go:

Tax prep guy: Your return is ready.  You are going to get $1,700 back.  Do you want to pay me now, or in two weeks?  If you pay me later, I'll just take it out of your refund.  It's really easy.

RAL candidate: Uh, that sounds pretty simple to me.  I'll pay you later.

Let's assume that the RAL candidate is operating with a good understanding of how much a RAL is going to cost.  That is a big assumption, considering how clear it is that many people do not have a strong financial education. In that somewhat optimistic scenario, the RAL applicant might realize that it's a very costly convenience to get the RAL.  That person might have explored options for credit to be had elsewhere.

That is the rub.  Because in the most optimistic scenario, what this tells us is that there is little recourse to find credit elsewhere for these poor consumers.  It reflects very poorly on our credit providers.  The only loan product that could be more expensive might be a payday loan.  Even credit cards would be far better - suggesting that for many of these consumers, credit cards are out of reach.

Looking at the RAL decision from a less rosy viewpoint will lead you to an even darker conclusion.  Then, the RAL is going to someone who does not understand the full implications of their choice.  That points to a lack of transparency. It's a situation that borders on coercion.

What is revealed is a situation that is aptly characterized as extortionate.

Let's play this out in the context of another product, almost as ubiquitous as cash and definitely something that you would have a "high discount rate" for in the event that you were caught without any of it.

Imagine if you ran out of gas.  The gas in this case represents cash.

You walk to the gas station.

The attendant notices that you are on foot.  He says, "gee, I just raised the price on my gas.  Today, my gas is $20 a gallon.  Sorry.  I think I will have gas in two weeks for $1.99.  Do you still want some fuel?"

Oh, yeah, that would be irritating.

But then the guy behind the counter goes on.  "Gee," he says, "I'd be happy to pump your gas for you right now."

FDIC issues Cease and Desist to Republic (RBCAA)

Adam R.'s picture

Posted February 27, 2009

The FDIC has issued a cease and desist letter against Republic Bank of Kentucky (RBCAA).  The issues concerns the funding of refund anticipation loans (RALs) by RBCAA.  The FDIC is asserting that Republic does not have adequate safeguards in place to thwart fraud among the tax preparers that submit their refund applications to RBCAA.

RBCAA also got its Community Reinvestment Act Evaluation today.  The company did well on services and investments, earning a high satisfactory rating.  However, on the lending test, RBCAA got a "needs to improve.  A "needs to improve" is a very bad score.  In recent years, less than 3 percent of all ratings have been as low as this.

RBCAA would be stung if they were unable to continue with their RAL lending.  Although the bank has regular branches in Louisville, they draw a substantial portion of their business from their tax refund services (TRS) segment.  In 2007, TRS consisted of 11 percent of net income.  Its steady income, too, so going forward it might be a hard thing to give up.

Losses on what would appear to be a relatively risk-less business, given that the Federal government provides underwriting to cue Republic if a filer has an outstanding tax lien, were actually 1.14 percent of TRS revenue in 2007.

The RALs are troubled by the lack of a healthy securitization market, more broadly.  It is not yet evident

Review: TARP Money for RALs at Pacific Capital

Adam R.'s picture

Posted February 7, 2009

Pacific Capital Bancorp (PCBC) got $181 million in TARP funds in November.  This California firm includes Santa Barbara Bank & Trust.  Santa Barbara Bank is one of the four banks in the United States (JP Morgan, HSBC, and River City are the others) that provides funds for Refund Anticipation Loans (RALs), through its subsidiary SBBT RAL Funding Corp.

RALs are something that you may never have heard about, unless you have a very high discount rate.  They are very expensive, but many people get them because they

Is TARP supposed to support all Lending, or just helpful lending?

Adam R.'s picture

Posted January 12, 2009

Think about what kind of implicit statement is made by a policy that provides taxpayer monies to create liquidity for a privately-held bank to provide funds so that income tax preparers can provide refund anticipation loans to consumers.  What are we doing if we borrow money so that a business can write loans to consumers to get their tax credit-driven refunds 10 days earlier? Why do we need to pay a private bank to speed up refunds of the Earned Income Tax Credit?  Is that efficient?

This is the process that is occuring when the US Treasury Department's Troubled Asset Relief Program (TARP) invests $181 million in Pacific Capital Bancorp (PCBC), a Santa Barbara, California lender.  PCBC supplies money to Jackson Hewitt and other tax

Bank open to using TARP money for Refund Anticipation Loans

Adam R.'s picture

Posted January 9, 2009

Pacific Capital Bancorp (PCBC) indicates that its $181 million TARP allocation will give it more liquidity, and provide alternatives for the bank to keep funding to its refund anticipation loan (RAL) business.

Check out this transcription of PCBC's last earnings call, on Nov. 21st, with investors:

Julianna Balicka -- Keefe, Bruyette & Woods

I have two quick questions on RAL and I'll step back. The $4.5 to $5 billion funding that you could potentially do on balance if all other methods fail, does that include your TARP capital or does your TARP capital funding change the game that you can now do more on balance sheet?

Stephen Masterson, CFO, PCBC

The TARP program obviously helps us in a lot of regards. We want to use that TARP money for the purposes that it was intended and that is to continue lending in our marketplace, to continue the economic viability in our marketplace to strengthen our banking infrastructure. We didn't take the TARP money to increase our RAL program or to build our RAL program, but it certainly helps our capital ratios.

RALs are short-term advances made to people filing their tax returns.  Instead of waiting for their refund, a RAL allows a local tax preparer to give the consumer their money by the next day.  If a consumer uses electronic filing, wait times for refunds average about 11 days.

PCBC does not provide tax preparation.  Instead, they act as the funder to the independent tax preparers.  Those tax prep


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