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Pacific Capital will be better off without RAL around

By   /   Monday, January 4th, 2010  /   Comments Off on Pacific Capital will be better off without RAL around

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At long last, the refund anticipation loan program, or RAL, is headed toward the dustbin of history — at least as far as Pacific Capital Bancorp is concerned.

On Christmas Eve day, Pacific Capital, parent company of Santa Barbara Bank & Trust, made a surprise announcement that it was selling its controversial tax refund loan business.

The buyer is likely to be a private equity fund with some tax preparation specialization. RAL is a tricky beast, but as Pacific Capital proved, it can be highly profitable.

In recent years the biggest share of profits at the region’s biggest banking company came from RAL, fueling an expansion spree that brought it into market leadership positions throughout Ventura, Santa Barbara, San Luis Obispo and Monterey counties.

But these programs were never popular with liberals and consumer advocates who annualized the fees on these very short-term loans to folks with no bank accounts and demonized the lenders. More conservative observers noted that programs such as RAL fueled thousands of small businesses by providing their owner-operators with liquidity needed to buy raw materials, equipment or meet a payroll and keep operating.

But whatever your political persuasion, one of the tricky little secrets behind RAL was that it required a tremendous amount of liquidity to fund billions of dollars in tax refunds in order to collect those highly profitable fees. As the program exploded in recent years, the funding got harder and harder, and in the post-Lehman Brothers era, there was no way to do the easiest thing — securitize the financing and sell it on the open market.

With its balance sheet weakened by loan losses, Pacific Capital can’t fund the program itself. Now it will do what it might have more profitably done years ago and sell off the program.

We’d observe that even in the regulation-light era of pre-Lehman days, RAL was an awkward fit for a bank that services some of the wealthiest members of some of the wealthiest zip codes in the United States. We’d also suggest that in the new era of community banking, where regulators are cranking down on whatever they perceive as unsafe practices even as our leaders are exhorting banks to lend to small business, getting rid of RAL makes even more sense.

Pacific Capital’s senior management will have its hands full bringing the bank back to profitability and restoring its damaged stock price to more “normal” levels. But with the distraction of RAL and RAL funding off of management’s desk, the job should be that much easier.

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