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Magazine : Archives : 3rd Quarter 2011

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July 21st, 2011 |

Pay climbs, but so does scrutiny

When it comes to pay, it was a little more lucrative to be a bank CEO in 2010 than it was in 2009. On the other hand, new rules put in place following the economic upheaval, including the Dodd-Frank Act, put greater scrutiny on board-level decisions about pay.

Overall, bank CEOs made a median salary of $429,190 and total compensation of $605,913 in 2010, according to an analysis of proxy statements of 144 publicly traded banks with assets of between $1 billion and $15 billion by executive compensation firm Pearl Meyer & Partners. That was up 16 percent from the median compensation last year.

Bank profitability and stock prices have improved in the last year, accounting for some of the gains, says Pearl Meyer & Partners’ Managing Director Susan O’Donnell.

However, 2010 came with a host of regulatory changes regarding pay, particularly in terms of disclosure. Many boards are responding with a huge amount of paperwork trying to explain why they paid their top executives what they did. Citigroup has a 41-page discussion of executive pay in its proxy statement this year, including the entire text of a committee report on the topic.

Even smaller publicly traded banks are under greater scrutiny, and almost all publicly traded companies have to submit their pay packages for a non-binding shareholder vote, called “say-on-pay.” Umpqua Holdings Corp., the Portland, Oregon-based parent company of Umpqua Bank, an $11.6-billion-asset institution, became the first banking company to have shareholders reject its pay package in April, with 61.8 percent of the votes saying “nay-on-pay.”

The vote showed the increasing influence in particular of proxy advisory firm ISS, or Institutional Shareholder Services Inc., which had recommended the “nay” vote. The firm says there was a “pay-for-performance” disconnect over CEO Ray Davis’ total compensation boost of 73 percent during the year to $3.98 million, despite the fact that the company’s one-and three-year total shareholder returns were below a peer average.

The bank took issue with ISS’ accounting and “formulaic” approach, noting that Davis had taken a 28 percent compensation cut in 2009 and had since returned the company to profitability, improved capital and liquidity and positioned the bank for growth.

O’Donnell says publicly traded banks with a lot of institutional ownership may be impacted by ISS recommendations going forward. A “no” vote from shareholders may be non-binding, but it garners bad publicity and it can lead to shareholder lawsuits.

She says that if a bank is underperforming its peers in terms of stockholder returns, banks can get ISS approval for pay packages if they have a strong pay-for-performance policy in place. Groups such as ISS also are pushing to get rid of tax gross-ups, when companies agree to cover an executive’s tax hit for severance packages.

LinkedIn Liability

Are you just one Facebook fracas away from hurting your bank? The American Bankers Association seems to think so. The trade association, which sells professional liability and bond insurance through a subsidiary, added an endorsement this spring to its Internet banking liability policy, at no extra charge, that will cover your bank for customer or regulatory claims relating to use of social media. 

For example, what if one of your employees “tweeted” an incorrect APY on a CD, and the Federal Trade Commission dings you for false advertising?

Monitor Liability Managers, a part of W.R. Berkley Corp., introduced a little different sort of social media endorsement in February to go on its employment practices liability insurance. It has a $100,000 limit of liability for defamation, libel or invasion of privacy if, say, one of your employees published an embarrassing YouTube video of a competitor dancing drunk on a table (hypothetical example provided by Monitor Liability Managers, thank you).

Holy matrimony: FDIC targets executives’ spouses

There’s a lot that’s unusual about the government’s lawsuit against former Washington Mutual Bank executives following its failure in 2008.

For one, the officers of the failed thrift aren’t the only ones getting sued by the Federal Deposit Insurance Corp.—so are their wives (A settlement deal was pending as of this writing). Plus, the FDIC is trying to get the couples’ assets frozen, an unusual move in such cases, according to Scott Sorrels, a litigation and regulatory partner with Sutherland Asbill & Brennan in Atlanta.

“It shows the high degree of aggressiveness in terms of the lawyers for the FDIC,’’ he says.  “You don’t usually see wives being sued.”

For the biggest bank failure in U.S. history, there’s also a virtual army of attorneys who have gotten involved, including nine on the government’s side. There are some heavy hitters among the 12 lawyers representing the executives’ side, including Brendan Sullivan of Williams & Connolly, who has experience defending people against government prosecutors, with clients such as Lt. Col. Oliver North of Iran-Contra fame and the late U.S. Senator Ted Stevens (Sullivan helped get the case against Stevens dismissed).

In a nutshell, the government’s WaMu case goes like this: CEO Kerry Killinger, Chief Operating Officer Stephen Rotella, and Home Loans President David Schneider took on a risky loan strategy for personal short-term gain that caused the thrift to lose billions of dollars due to “negligence, gross negligence and breaches of fiduciary duty.” Lawyers for the two executives did not return calls for comment.

In the lawsuit filed in March in U.S. District Court in Seattle, the government says hubbie Stephen gave Esther Rotella $1 million and put ownership of a home in Orient, New York in two irrevocable trusts, one in his name and the other in hers.

Kerry Killinger allegedly transferred ownership of a home in Shoreline, Washington to trusts benefiting himself and his wife, a home tax assessors say was worth about $3 million last year. The two also transferred ownership of a home in Palm Desert, California to two trusts in each of their names, the lawsuit says.

Will other wives face similar lawsuits when their spouses’ banks go under? So far, that hasn’t been the case.

“The FDIC seems to think the asset transfers were substantial, otherwise, I don’t think they’d go through the trouble (of suing wives),’’ says Bard Brockman, a Bryan Cave attorney in Atlanta who is not involved in the case.

Regulatory reform is top concern

The majority of bank CEOs and CFOs aren’t hugely optimistic about the economy, but nearly one-third plan to increase their workforce in the next six months, partially to meet regulatory demands, according to the latest Grant Thornton LLP Bank Executive Survey in association with Bank Director magazine.

Fifty-two percent of bankers surveyed think the economy will stay the same in the next six months, and 39 percent think it will improve, according to the April and May survey conducted by email, which drew 379 responses from bank CEOs and CFOs.

“I don’t think the results are overly positive in a lot of ways,’’ says Nichole Jordan, Grant Thornton LLP’s national banking and securities industry leader, adding the survey reflects what she’s hearing from clients. “You certainly don’t see many saying that they believe the economy will improve significantly in the near term.”

Thirty-two percent, or 119 bank executives surveyed, expect to increase the number of people they employ at their bank, which was up from 23 percent who felt that way in August of last year and as little as 18 percent who said so in 2009. Fifteen percent, or 57 executives, expect to decrease employment.

Some of the increased hiring may be due to the anticipated higher costs of regulatory compliance.  Thirty-four percent of banks said they would hire additional staff to meet increased compliance demands. The compliance burden also will increase work for outside firms as well, with 21 percent of bank executives surveyed saying they planned to hire an advisory services firm to help with compliance.

There is a lot of work to be done when it comes to regulatory demands. A full 56 percent of executives said they were not currently equipped to meet increased compliance needs; and 8 percent said they had not begun planning to meet those demands.

“The regulators have yet to know what all is or will be involved,’’ one executive wrote on the survey. “We as a small community bank know our cost and time will drastically increase as the final regulations are passed down to us.”

The burden of regulatory reform was a concern for the vast majority of bankers surveyed—91 percent said it was a concern, much closer to being a unanimous problem than was exposure to any particular kind of loan losses.

When it came to loan losses, exposure to commercial real estate was the largest concern, with 57 percent of those surveyed citing it. Midwest and the Southeast bankers were the most worried about commercial real estate losses, with 62 percent and 63 percent, respectively, saying that was an issue. In the Northeast, 96 percent of bankers expect to grow through organic loan origination, while only 80 percent of banks in the Southeast expect such growth. 

nsnyder

Naomi Snyder is the managing editor for Bank Director, an information resource for directors and officers of financial companies. You can follow her on Twitter at twitter.com/naomisnyder or get connected on LinkedIn.