Pacific Capital Bancorp reminds me of that difficult family member that keeps on finding new ways to create problems.

This week, the news is that Pacific Capital is one of three banks that has announced that it will not be able to make its TARP dividend payment to the Treasury Department. Pacific Capital (PCBC) received $180.6 million last fall. It is a bad sign about the financial health of a bank that routinely pushes bad financial products on poor consumers.

For a refresher about PCBC, read this here.  The summary of the facts are that PCBC, located in posh Santa Barbara, California, is unable to turn a profit through traditional branch banking.  The bank makes loans on small businesses and home mortgages.  Even in Santa Barbara, though, they aren’t able to find a way to make that work profitable.

Instead, PCBC makes its profits by capitalizing the refund anticipation loan (RAL) business.  It partners with main street RAL providers like Jackson Hewitt.

A RAL is an unusual product.  If you haven’t heard of it, its probably reflects well about your financial habits.  Nonetheless, millions of Americans use this product during tax season.  A RAL is an advance on a tax refund.  Typically, a tax preparer will (more…)

Lakeland Financial, an Indiana holding company for Lake City Bank, is remarkably consistent in its approach to the community and its shareholders.  In both cases, the approach seems to be that they are “just not that into you.”

Lakeland is a state-chartered commercial bank with $2.7 billion in assets, located in Warsaw, Indiana. Both the firm’s executive compensation policies and its service to the community leave a lot to be desired.

In 2007, the Federal Reserve gave Lake City a “needs to improve” rating for its Community Reinvestment Act exam.  This is a very low rating – in fact, only 26 of 1777 banks examined that year got this rating.  So, Lake City appears to be an underperformer in terms of its service to the community, in spite of the fact that its structure as a small-to-medium sized bank located in a small town would seem to dictate otherwise.

Proxy governance advocates are citing Lakeland for its unusual compensation policies.  Christian Brothers Investment Services, a socially responsible investment firm that provides guidance to Catholic institutions (pension funds, schools, dioceses, et al.) as well as outside investors, cites Lakeland for its practices.  Christian Brothers is quoted in a Wall Street Journal story for its decision to vote against the proposal on the compensation of named executive officers at Lakeland.

The critique focuses on how Lakeland is setting the bar for rewarding its leaders. The company revised the previously established guidelines for performance, now that market conditions are harder. See the expected growth rates tied to the issue of performance rewards, as originally issued and as later revised:

Although the company’s share price is at or near $20 right now, the company continues to offer options that do not incentivize in a manner consistent with the firm’s stated goal of rewarding performance with pay.  Lakeland’s existing compensation plans awarded its leaders with 399,756 options in 2008, including 30,000 to its named executive officers.  The weighted-average exercise price in existing plans is only $14.25. Some of the options in the executive’s portfolios are well below that – the CEO, for example, holds 20,000 shares with an average exercise price of $6.81 (good until 2011) and another 20,000 with an average exercise price of $17.19 (good until 2013).

Generally, the principle of rewarding performance with pay suggests that options would be awarded at a price above the existing market value.

In the past year, the company’s earnings fell.  In spite of that, the board decided to increase its executive’s salaries by almost 5 percent and its bonuses by a similar amount.

Lakeland received $56 million in preferred shares from the TARP program.

As much as advocates, policy researchers, regulators, and bankers are sensitive to the perceived issues surrounding the ongoing investment in AIG, it probably understates the  public’s reaction to this issue.  Moreover, while their understanding is probably given nuance if they have an understanding of credit default swaps, this is largely limited to a small ecology (the “chattering classes” of like-minded people.

For a lot of regular people, though, it’s not that complicated.  It is just a confirmation of all that is wrong with our system, at least in the minds of people who don’t buy any derivatives and don’t get the welcome mat rolled out when they walk into their friendly banker.

Case in point, our office has an exterminator service. She comes about once a month.  Yes, that’s a lot, unless you live in the South, and then it is just appropriate and necessary.

Well, the AIG thing is on her mind today.

“They are just a bunch of crooks!” she says.

Her gloved hands swing up in the air.

“They just want to give their people more bonuses.  Let the xxxx people go,” she says, “and hire a bunch of people who are cheaper. ”

As she left, she shouted “they should go to prison!”

I want to ask her about the needs of all those counter parties.

It reminds me of another conversation I had about two years ago, about our political systems, in one of the more unexpected environs for such a conversation.

I was speaking with a man who was living out of an unheated mobile home, in an abandoned mobile home park in rural North Carolina.  He had to carry his water.  He was running a hot plate (and a tv to watch the Panthers) off of the battery on his Aerostar.

He was pretty aware of what economic class he belonged to.  Right away, this is unusual.  Studies show that most people place themselves above where they belong, out of optimism or pride.  Working class people identify as middle class, and middle class folks see themselves as “upper middle class.” This makes many of the ideas propagated by liberals fall on deaf ears.  Many of the very recipients who would benefit from less regressive taxes, for example, assume that they would not have anything to gain.

That was not true with him.

“Us people at the bottom,” he said, “we get nothing.  The politicians are so worried about the middle class.  They ain’t got nothing for people like me.”

I think that only a few issues are able to capture the ire of many non-political types. For many, I think that the basis for assessing our leaders is driven not by the wisdom of decision-making, but by the power of symbols. It is about the icebergs:  Enron, Willie Horton, and perhaps the Titanic of them all:  Watergate.  Bernie Madoff could be next.  How many people could tell you about John Kerry’s view on pay-go, compared to his arguable status as a flip-flopper?

I say non-political for a few reasons:  Newspaper readership is highest among people with college degrees, or older folks.  The man in North Carolina that I spoke with did not believe in voting. Actually, in my tours around mobile home parks, not voting is a constant characteristic.

Only a relative few events resonate.  More significantly, they are not easily forgotten.  AIG is one of them.  So, if you have mixed feelings about AIG (and you are reading this finance-related blog) then rest assured that many others are even more irritated.

Fifth Third Bank, a recipient of TARP funds, has been giving away money through scratch-off cards.  The contest, is open to anyone in the bank’s footprint.  It was announced in September and ran through Nov. 24, 2008.  It was called the “Unlock Your Dreams” contest.

Prizes include a $250,000 award, as well as a bunch of smaller instant offers.

The prize awards were given out after Fifth Third received $3.4 billion through TARP.

The bank’s share price has dropped dramatically in the last year.  Today, shares are trading for $2, whereas last year at this time they went for $23.68.  Recent reports suggest that Moody’s may downgrade their debt by two notches.  Its long-term debt is currently rated A2.

Fifth Third also spends money on naming rights for Dayton’s Fifth Third Field, home of the Dayton Dragons. They also have purchased the naming rights to Fifth Third Field, home of the Toledo Mud Hens.  And, they put money toward the naming rights for Fifth Third Arena, home of the University of Cincinnati Bearcast basketball team.

Republican Congressman Steve LaTourette (R-Oh) has voiced his concerns about the sweepstakes.

Who’s to blame here?  Well, it seems like Fifth Third may suffer some of the impact if there is ongoing outrage about this issue.  It’s not likely to be an AIG type of response, nevertheless.  More like a minor tremor.

Still, part of the problem goes back to lack of oversight given to the disbursement of TARP funds.  The frivolous use of funds is hardly limited to 5/3.  Citigroup is still putting its huge contract into naming rights for the new stadium that will house the Mets.  These are symbolic problems.  It is easy to say that they are only minor issues, but the public understands less about the details of TARP or TALF compared to the obvious political implications conveyed by these kinds of issues.

Then there are the non-symbolic problems.  Sometimes, TARP money is going for activities that are entirely non-productive.  Some are actually acting to counter other government policies.  There are firms using TARP money who also rely on refund anticipation loans for most of their income. Those RALs are largely paid for against expected returns on Earned Income Tax Credits.  That is the federal government’s biggest instrument to thwart poverty.  Oh, and the RALs create excellent avenues for fraud.  Look at the losses experienced by Pacific Capital Bancorp (PCBC) related to fraud on its RAL business.

Someone at Treasury should have expected this and made some kind of pre-emptive clause in TARP funding to prevent this problem.

The Community Reinvestment Act will be fully examined on Tuesday at a special forum, hosted by the Boston and San Francisco branches of the Federal Reserve, at the Mandarin Oriental Hotel in Washington, DC on Tuesday.

The event will coincide with the publication of “Revisiting the CRA: Perspectives on the Future of the Community Reinvestment Act.”

There are a lot of interesting ideas in the 21 papers contained within the publication.  Ideas have been contributed from across the spectrum of politics and market positions.  The American Bankers Association has a comment, as does the former CRA officer from JP Morgan Chase.  A representative of AON, the largest insurance broker in the country, weighs in against proposals to expand CRA to her industry.  Former heads of the OTS and the OCC have things to say on behalf of the CRA.  A “conservative with a concious,” as he identifies himself, finds three relevant areas for the CRA to be re-entrenched – in home lending, in payment services, and in consumer education.

Some of the issues that appeared in many papers include:

• More types of financial institutions, beginning with independent mortgage brokers, should come under the review of the CRA.
• Data in the Home Mortgage Disclosure Act database and the CRA small business and community development lending database need to be updated.  Those updates should become the basis for a redefinition of the goals of the CRA exam.
• Banking as an industry has changed.  More financial institutions have become national or even global.  The notion of a local commitment must accordingly be updated.
• The scale of some banks, as a result of mergers, makes them relatively insensitive to the CRA exam.  This, coupled with grade inflation on the exam scores, means that very few CRA exams bring to bear any kind of direct response from a financial institution.  A redesign of the CRA look at how it can adjust for these very large institutions.

Some urgent questions remain unsettled:

What is the purpose of CRA? Does it have an implicit, but not stated, understanding that extends to race? Does the CRA require banks to make unprofitable loans or to establish unprofitable branches.  How well do CRA loans perform?  Are loans in low-income communities best percieved as a public good, for which their under-supply is only mitigated by government intervention?

Is there a quid pro quo because of deposit insurance, the discount window, and TARP?

What is the proper role for community groups?