Jackson Hewitt shares drop 23%

Stock falls $1.34 as tax preparer’s partner stops refund loans

— Shares of Jackson Hewitt Tax Service Inc. fell 23 percent Thursday, the worst on the New York Stock Exchange, after its bank partner cut off funds for tax-refund loans.

Regulators ordered Santa Barbara Bank & Trust to stop providing money, which covered about 75 percent of Jackson Hewitt’s financial products program, according to a federal filing by the Parsippany, N.J.-based tax preparer.

Jackson Hewitt, the No. 2 tax preparer behind H & RBlock Inc., dropped $1.34 to close at $4.50 in New York Stock Exchange trading, and sold for as little as $4.30. The stock has fallen 71 percent this year. H&R Block shares rose 3.7 percent to $21.59.

Tax preparers are locked in a battle for customers, with Jackson Hewitt vowing earlier this month to regain market share from H&R Block. Firms attract clients with refund anticipation loans in which customers who need cash immediately can get a short term loan, typically lasting a few weeks, that’s based on the expected amount of their tax refund.

Jackson Hewitt, with 6,600 outlets and nearly 3 million clients, has been losing customers to Kansas City, Mo.-based H&R Block and Intuit Inc., which makes TurboTax software. It suspended its dividend in March and has hired Goldman Sachs Group Inc. to explore “strategic alternatives,” language that typically means a company may be sold.

Messages left with Jackson Hewitt spokesman Sheila Cort weren’t returned.

Consumer-advocacy groups have faulted refund anticipation loans for putting people deeper in debt and for high interest rates. The effective rates equal as much as 500 percent for a $300 loan over a 10-day repayment period, according to a study by the Consumer Federation of America and the National Consumer Law Center.

The Office of the Comptroller of the Currency told Santa Barbara Bank & Trust on Dec. 18 that the lender would not receive regulatory approval to originate refund-anticipation loans in 2010, according to a statement Thursday from the bank’s parent, Pacific Capital Bancorp. The bank signed a nonbinding letter of intent with a private equity firm to sell the tax business, the statement said.

“It will certainly lower our profitability,” said bank spokesman Tony Rossi. “The primary impetus is a desire on Pacific Capital’s part to return to its roots as a strictly community bank focused on supporting the economies of its local markets. The tax-refund loan business is a sort of niche business that falls outside of what would be considered core banking operations.”

Pacific Capital, the third biggest provider of tax-refund loans, received $180 million from the Treasury Department’s Troubled Asset Relief Program. Community groups criticized the bank for using government bailout money to make the “high-priced” refund-anticipation loans, the California Reinvestment Coalition said in a Jan. 8 statement.

Business, Pages 25 on 12/25/2009

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