Santa Barbara-based Pacific Capital Bancorp announced Dec. 24 that it is selling its controversial tax-refund loan program after federal regulators did not approve the bank to originate any refund-anticipation loans during 2010.

Pacific Capital, the parent of Santa Barbara Bank & Trust and several other banking brands on the Central Coast, said it has signed a non-binding letter of intent with a private equity firm to sell its tax division before the start of the 2010 tax season in January.

The refund loan programs have generated much of the profit that the bank used to expand over the last decade. The business provided taxpayers a loan based on their estimated income tax return. The consumer received instant cash minus some fees after filing his or her taxes, and the IRS sent the refund to Pacific Capital.

But the program – along with receiving strong criticism from consumer advocacy groups – has also drawn the attention of the federal Office of the Comptroller of the Currency, which has been closely watching the bank’s capital ratios. Pacific Capital’s write downs on refund loans nearly doubled between 2008 and 2009, from $41 million to $81 million. Whereas in the past the bank would bundle those loans up and sell them off so they didn’t clog its books and require extra capital, the dead credit market at the beginning of 2009 meant the bank had to take $2 billion of the loans onto its balance sheet.

“Following the review of our capital plan with the OCC, we have determined that the best course of action is for the company to pursue a sale of the tax division,” George Leis, Pacific Capital president and chief executive officer, said in a release. “The sale of the business will help return Pacific Capital Bancorp to its roots of being a pure community bank serving the Central Coast of California, while also providing an infusion of capital that will further strengthen the financial position of the company.”

Pacific Capital’s capital ratios have been under close scrutiny by federal regulators for months. It fell well short of its voluntary agreement with federal regulators to boost its tier one capital ratio to 9 percent by Sept. 30. The ratio – which consists of the bank’s free cash divided by its loans and other assets – came in at 5.6 percent, essentially unchanged from the quarter before.

The bank held its capital steady in the third quarter – during which it turned in a $40.7 million loss – halting a decline in capital ratios. But the bank is still retaining an investment bank to help it evaluate options – which could include a merger – to boost its liquidity.

The company’s stock was trading a few cents higher at $1.08 by midday on Dec. 24. The troubled bank’s shares have taken a beating over the past year, at some points trading for less than dollar, down from a 52-week high of above $17.

On Dec. 9 the bank announced that chief financial and operating officer Stephen Masterson is leaving the company after a short but eventful tenure. His resignation will become effective March 12.

According to a company press release, the entire management team of the tax division, led by Rich Turner, will continue to manage the operations after the sale of the division.