It's been a bad few weeks for Wilmington Trust Corp. Make that a bad year.
The $10.4-billion-asset Wilmington, Delaware-based bank, which specializes in advisory services for wealthy clients and personal trust accounts, reported a $370 million loss in the third quarter of 2010 after it beefed up its loan loss provision. The bank, which has been around since 1903 but recently stumbled on bad commercial real estate loans, will be acquired this year by Buffalo, New York-based M&T Bank Corp. The deal was announced Nov. 1 at a value of $351 million or $3.84 per Wilmington Trust share, a 46 percent discount to the prior trading day's closing price. No doubt Wilmington Trust shareholders are still unhappy because the bank was trading at about $4.41 per share Tuesday morning on the New York Stock Exchange.
It gets worse.
The bank subsequently announced in December that it was yanking back most of the CEO's 2010 compensation, more than $1.75 million, because his pay package violated the rules for banks that participated in the federal government’s Troubled Asset Relief Program. (Wilmington Trust received $330 million in TARP funds in December 2008.) Oops! Bloomberg News picked up the story last week from one of the bank's regulatory filings.
The TARP rules can be fairly complicated. But they aren't complicated on this point:No retention or signing bonuses are allowed for banks that took TARP money according to multiple compensation experts, including Paul Hodgson, senior research associate at GovernanceMetrics International, formerly known as The Corporate Library, and Susan O'Donnell, managing director at compensation consulting firm Pearl Meyer & Partners.
Back in June, when Wilmington Trust board member Donald Foley was hired by the board to replace Ted T. Cecala as CEO, Foley was given a $1.75 million signing bonus that was clearly disclosed to shareholders. A full $1.3 million of that was to be paid in restricted stock vesting immediately and the rest of the $450,000 was in cash.
Then in December, the bank said it was taking back the full $1.75 million signing bonus and an additional 16,000 shares in restricted stock. And it also rescinded a part of the pay agreement that awarded Foley 14 years credit on the company’s executive retirement plan. Ouch!
The board did agree to increase Foley's base pay from $1.2 million to $1.5 million, which is allowed under TARP, but the move doesn't nearly make up for what was taken away.
Contrary to news reports, this doesn't look like a claw-back, where a company is forced to take back executive pay based on a restatement of earnings or fraud.
"It's a unique situation,'' says Tim Bartl, senior vice president and general counsel for the Washington, DC-based Center on Executive Compensation, which was started by the human resources industry group, the HR Policy Association. "(This was) a do-over, more than it was a claw-back.
So who screwed up? Did the compensation committee fail to look at the TARP rules when granting the incentive package? Or did a consultant paid to do this job fail to understand the TARP restrictions? Foley did not return a phone call this week on the matter and a company spokesman, Bill Benintende, issued a statement saying the board took the action to comply with TARP rules and: " . . . the Board wishes to express its recognition and appreciation of the fact that since he became CEO in June, Mr. Foley has worked tirelessly and effectively to address both the challenges and opportunities facing Wilmington Trust."
O'Donnell and Hodgson had never heard of a TARP bank having to take back a signing bonus, and TARP rules have been in place for more than a year.
But what about Wilmington Trust? How long will Foley's tenure last at this point, especially since M&T is buying the company? (He has been invited to join the board of the newly merged bank). What kind of fruitful relationship can the board possibly have with Foley after reaching into his pocket and taking back nearly $2 million?
"That has to be a difficult conversation,'' Hodgson says, in what may be the understatement of the year.
Stanley Baum, an attorney who consults with companies on compensation issues for Lerner Law Firm & Associates in Westbury, New York, was less circumspect.
"My impression is, 'what the heck is going on over there?''' he says. "It's so blatant, you wonder what sort of procedures are in place here and at other companies."
The upside is there probably won't be too many more of these banks that have this problem, say Bartl and O'Donnell – not after Wilmington Trust embarrassed itself publicly.
For a full primer on the pay rules regarding TARP banks, check this out:http://www.kattenlaw.com/treasury-releases-tarp-executive-compensation-and-corporate-governance-guidance-06-19-2009/