Fraud sinks Pacific Capital earnings

Pacific Capital Bancorp, which specializes in lending money to taxpayers that is intended to be repaid with federal tax refunds, said losses from loans on fraudulently filed tax returns wiped out most of its expected third-quarter profit.

The Santa Barbara-based bank’s failed loans erased $22.4 million, or 27 cents a share, from earnings, the company said Monday.

Pacific Capital shares fell $4.36, or 18%, to $20.30.

The company makes so-called refund-anticipation loans to customers when their tax returns are filed. The amount of each loan is based on the customer’s expected tax refund.

This year, the Internal Revenue Service improved its fraud detection capability, the company said. That led to denials of refunds for Pacific Capital’s borrowers.

Other banks that provide refund loans also “have been victims of fraud this year at an unprecedented level,” Pacific Capital Chief Executive George Leis said in a statement.

To reduce future losses, the company said it would avoid customers “possessing certain characteristics.”

But Manuel Ramirez, analyst at investment bank Keefe, Bruyette & Woods Inc. in San Francisco, wrote in a note to clients that the losses made him “very cautious on the viability” of Pacific Capital’s business model.