This tax season was especially good for Santa Barbara Bank and Trust - and coming years should be even better.

The $2.6 billion-asset bank is one of only three financial services companies in the country that grant immediate loans to taxpayers who file their returns electronically with the Internal Revenue Service and who expect refunds. Santa Barbara has also made a business of charging fees for tax filers who need a direct deposit account - an IRS requirement for those filing electronically - to get their refunds.

Last month the bank said that this tax season it made $25.2 million in pretax income from the business, in 2.8 million lending and refund-transfer transactions. Last year it made $16.1 million on 1.7 million transactions.

Those year-to-year numbers are likely to keep improving as more taxpayers use TurboTax or other electronic filing methods. Congress has mandated that the IRS process at least 80% of the country's tax returns electronically by 2007, and that challenge, said Santa Barbara Bank senior vice president Rich Turner, "is very exciting to those of us in this industry."

"Right now about 30% of the returns are being processed electronically," he said, so there will be significant growth even if the IRS does not meet the 80% goal.

The niche is an important one to the bank's parent company, $3.7 billion-asset Pacific Capital Bancorp, which has three other bank subsidiaries. Second-quarter income from Santa Barbara Bank's tax program represented about 18% of the holding company's overall earnings and helped offset the impact of the Federal Reserve's rate cuts on core banking operations. Over all, Pacific Capital's net income declined 5%, to $11.5 million, because of a squeeze on net interest margins.

With this program the bank has "a revenue stream that is independent of many of the economic trends that banks typically have to deal with," as well as geographic diversity, Mr. Turner said.

David Winton, an analyst with Keefe, Bruyette & Woods Inc. in New York, agreed. He said that the tax refund loan business is a highly coveted niche and that because of the bank's success in it, earnings could grow faster than those at a typical community bank.

"The program is a great source of fee revenue for them," Mr. Winton said. "It's also a high-growth business, particularly since the federal government has a mandate to the IRS to increase electronic filing and they are one of the three players in the business."

Santa Barbara Bank is the smallest by far of the three companies that have virtually cornered the market in the electronic tax refund business. Household Finance Corp. of Prospect Heights, Ill., with $58.6 billion of assets, has a commanding lead, with about an 80% share. Bank One Corp. of Chicago, with $270 billion of assets, and Santa Barbara Bank have about 10% each.

The bank entered the market 10 years ago, when electronic filing was first introduced. It partnered with an emerging technology firm that provided professional tax preparers with software to calculate taxes and send returns electronically to the IRS.

In that software Santa Barbara Bank included electronic loan applications for tax filers to receive a loan in the amount of the expected refund - minus a fee - within 24 hours. Refunds are then routed directly to the bank by the IRS two to three weeks later.

In cases in which tax filers need a temporary direct deposit account to receive their refunds, they can pick up their tax refunds either at the bank's branches - if they live in California - or their tax preparer's office. Santa Barbara Bank's fee and the tax preparer's fee are deducted from the refund. This way filers do not have to pay the tax preparer's fee up front, nor do they need a permanent address or a bank account - a feature that appeals to the unbanked, Mr. Turner said.

Santa Barbara Bank's early entry into the industry has enabled it to develop additional relationships with other software companies, increasing its relationships with tax preparation services, certified public accountants, and attorneys. The bank also enjoys a long-standing relationship with the national tax preparation firm Jackson Hewitt Tax Service of Parsippany, N.J., and has a partnership with Intuit Inc. of Mountain View, Calif., which provides tax preparation software and online services directly to taxpayers.

The loan and refund transfer programs are completely automated, but Santa Barbara Bank still maintains a call center, which is staffed by up to 90 people during tax season to answer questions.

To most of the customers, "we're not their bank on the street corner across from the drug store - we're an electronic entity for them," Mr. Turner said. "So we go out of our way to make sure they know their funds are safe."

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