A Second Life for an American Bank

Written by


bank-rebirth-8-18-16.pngThere were 437 bank failures in the United States between 2009 and 2012, according to the Federal Deposit Insurance Corp., most of them victims of the financial crisis and the sharpest economic downturn since the Great Depression. CalWest Bancorp was not one of them, despite experiencing some financial difficulties of its own during the crisis years, and today it faces a bright future with a successful recapitalization and reconstituted board.

As much as anything, the story of CalWest, a $136.6 million asset bank holding company based in Rancho Santa Margarita, California, is a strong vote of confidence for the potential of community banking. It is often said that small banks, especially those under $500 million and even $1 billion in assets, won’t be able to survive in a consolidating and increasingly competitive industry. The story of CalWest is about a group of professional investors who put $14 million into the bank and joined the board without compensation because they believe in the long-term future of their small community bank and are ready to roll up their sleeves and get to work.

Formed in 1999, CalWest has four branches in Southern California’s Orange County that uses three different names: South County Bank in Rancho Santa Margarita, where it has two branches, Surf City Bank in Huntington Beach and Inland Valley Bank in Redlands. President and Chief Executive Officer Glenn Gray says CalWest provides “white glove service” to a small and midsized businesses. “These are companies with probably $30 million or less in annual revenue, mostly family owned,” says Gray. “We focus on C&I lending, although we do commercial real estate [lending] as well.”

CalWest’s biggest problems during the recession were primarily bad commercial real estate loans and loans guaranteed by the Small Business Administration. The bank tried “quite a few different attempts” to either recapitalize or sell itself without success, according to Gray, although it did take approximately $5 million in Troubled Asset Relief Program (TARP) funds from the federal government in 2009. Attracted by the challenge of reviving a flagging franchise, Gray signed on as CEO in 2012, leaving a different Orange County community bank where he had been the CEO for six years. “I made the move primarily because of the opportunity to come into something that clearly needed to be fixed,” he explains. “I had a pretty good idea that it could be fixed. I like doing turnaround situations.” Gray was also drawn in by the chance to invest personally in the bank’s recovery.

The bank had entered into a consent agreement with its primary regulator, the Office of the Comptroller of the Currency, in January 2011, that among other things required it to raise its regulatory capital ratios. Gray spent the next couple of years cleaning up the loan portfolio and shrinking the bank’s balance sheet to improve its capital ratios, but wasn’t ready to raise new capital until 2015 when it retained Atlanta-based FIG Partners to manage a recapitalization of the bank. The effort ended up raising $14 million in fresh capital in December of last year from a group of private investors, although it actually had commitments for $30 million, according to Gray. The funds will be used to strengthen the company’s regulatory capital ratios, support its growth plans and retire the TARP funding. The consent order with the OCC was terminated in May.

One of those investors is Ken Karmin, chairman and CEO of Ortho Mattress Inc., a bedding retailer located in La Marada, California, and a principal in High Street Holdings, a Los Angeles-based private equity firm. Karmin had first met Gray shortly after he took over at CalWest in 2012 and they talked about Gray’s plans for the bank. “It was just too early in the process for new capital to come in,” Karmin recalls. “He had work to do to get the bank in a position to be recapitalized. But I was impressed from the moment we met. I knew he was the real deal; a very capable CEO…in control of the situation and every facet from BSA [Bank Secrecy Act] to credit quality, the investment side, lending, the relationship with the regulators. It was an amazing opportunity for investors like me to put money behind someone like Glenn, who can really do it all.”

Karmin came in as a lead investor and today serves as CalWest’s board chair. (All but two members of the previous CalWest board—Gray and Fadi Cheikha—voluntarily resigned when the decision was made to raise capital by bringing in new investors.) Other investors, who also received a board seat, were William Black, the managing partner at Consector Capital, a New York-based hedge fund; Jonathan Glaser, managing member at Los Angeles-based hedge fund JMG Capital Management; Clifford Lord, Jr., managing partner at PRG Investment and Management, a real estate investment company in Santa Monica, California; Richard Mandel, founder and president of Ramsfield Hospitality Finance, a New York-based hotel real estate investment firm; and Jeremy Zhu, a managing director at Wedbush Asset Management in Los Angeles.

Although Gray and Cheikha did stay on as directors, the current board is really a new animal. The rest, with the exception of Zhu, were people that Karmin already knew. The new CalWest board also has an awful lot of intellectual and experiential horsepower for a small community bank. “A board for a bank of this size, we have the luxury of intellectual talent basically at our finger tips,” says Karmin. The composite knowledge base of the CalWest board includes extensive experience in C&I lending, BSA, investing, commercial real estate and the capital markets. “We have the talent to make intelligent, thoughtful decisions and support management,” Karmin says.

When asked what kind of culture he would like to create on his board, Karmin mentioned a couple of things. First, he says the current directors are “willing to serve and do the work and the heavy lifting.” And from an investment perspective, they are taking the long view. Karmin says they will not receive any fees or compensation for their board service “until the bank is right where we want it, operating at the highest possible level.” Nor will the directors be taking personal loans from the bank. “If you want to borrow from our bank, this is the wrong board for you,” he says. “We’re not going to do any Reg O loans.”

More importantly, perhaps, Karmin wants a board that is very focused on performance. “We want a culture of first quintile performance,” he says. “That means that we expect our financial performance on the most important metrics to be in the first quintile of banks of our size in our geographic area.”

Given the strong private equity and investor background of all of the new directors, it’s logical to assume they will be looking for an exit strategy at some point. Karmin suggests that day, when it finally arrives, will be well off into the future. For one thing, Karmin and Gray are jazzed about the potential of the Southern California market. With about 9 percent of the country’s population, “We expect that it’s going to be one of the most important growth areas in the United States,” Gray says. “Whether the [national] economy grows 2 percent or 1 percent, it’s not going to matter to us. We’re going to be a first quintile performer under all those scenarios.”

“We have instructed Glenn to run the bank for the long haul,” Karmin says. “We were making this investment for a lot of different reasons, but that we expected to be investors and to be on the CalWest board for a long time. We have real plans to grow the bank in a controlled strategic fashion. [The directors want to] use our contacts to make new contacts, use our contacts to make new loans, use our contacts to gather new deposits. We are the kind of a board that can really help on all those metrics.”

Gray says this is the fourth bank board that he has participated on and the CalWest board is very different from all the others. “It’s a board that is very involved,” he says. “They ask good questions. They ask tough questions. If you wanted to be a CEO of a bank [that has] the old country club atmosphere, this would not be the place to be.”

Banks Increasingly Use Sub Debt to Raise Capital

Written by


2015 is set to become the third year in a row that total capital raised among U.S. banks has increased—on track for more than $140 billion issued by year-end. The recent boon in capital raising activity generally is attributed to the simultaneous increase in public bank stock values. The effect of market values on the decision to raise capital should not be discounted; however, capital demand has continued despite the market’s recent volatility and perceived weakness. Why has this trend continued?

The confluence of three factors, in particular, within the banking industry have helped fuel capital demand and have shifted demand for different forms of capital, including an increased demand for subordinated debt. First, the interest rate on Troubled Asset Relief Program funding has increased to 9 percent for most banks that still hold TARP funds. Second, participants in the Small Business Lending Fund have experienced—or will soon experience—an interest rate hike on those funds to 9 percent or more. Third, banks that deferred interest payments on trust preferred securities in the wake of the financial crisis must determine how to repay the deferred interest after five years or risk default. Each of these factors is prompting banks to consider capital alternatives.

The Rise of Subordinated Debt
Subordinated debt has become the darling form of capital for community banks (i.e., those banks less than $10 billion in assets). Thus far in 2015, subordinated debt has comprised 30 percent of all capital raised by community banks—up from 24 percent in 2014 and 7 percent in 2013. Why has this form of capital become so popular?

In simple terms, banks facing rate hikes on TARP, SBLF, and/or repayment of trust preferred securities have taken advantage of the low interest rate environment to raise capital on more favorable terms. Furthermore, the interest expense paid on subordinated debt is tax-deductible and it generally qualifies as Tier 2 capital on a holding company consolidated basis. In other words, newly issued sub debt can enable banks to reduce debt service requirements, increase regulatory capital, and preserve current ownership interests that otherwise could be diluted by raising common equity.

And as banks have become more creditworthy and investors have raised funds dedicated to community bank sub debt investments, the interest rate on sub debt has steadily declined: the median coupon for sub debt issuances in 2015 is approximately 5.25 percent, down from 7 percent in 2011. 

You’ve Decided to Issue Sub Debt…Now What?
The process of issuing sub debt for most banks is straightforward. Investment bankers generally know investors with an appetite for sub debt and can provide banks with preliminary term sheets relatively quickly. For banks with more than $1 billion in assets, it could make sense to obtain a bond rating from a rating agency; the process generally takes four to six weeks and can be a great marketing tool when raising capital. A solid rating helps banks achieve better terms and opens the door to new potential investors, such as insurance companies, plus it gives investors added comfort in their own assessment of the deal.

Investor demand for sub debt will continue to increase as long as interest rates remain low and bank balance sheets remain strong. Banks considering a future capital raise should understand the benefits of sub debt and seriously consider it while the market is ripe.

Trends in CEO Pay: Work Now, Get Paid Later

Written by


The financial crisis has had a huge impact on the way banks pay their executives and even their loan officers, but CEO pay is definitely creeping back upward. The smallest community banks to the international mega-banks have all made changes in the last few years to reduce the likelihood that employees will take big risks that threaten the long-term health of their financial institutions.

Many banks are moving away from short-term incentives, paying smaller amounts in cash bonuses for meeting short-term performance goals, and paying equity gradually over a longer period of time in the form of restricted stock based on performance goals.

One of those banks is First Commonwealth Financial Corp. in Indiana, Pennsylvania, a $6 billion-asset institution with 112 offices.

Bob Ventura, chairman of the board’s compensation and human resources committee, said at Bank Director’s Bank Executive & Board Compensation conference in Chicago recently that the bank has moved from paying a roughly 75 percent/25 percent ratio of compensation in short/long term pay to now using a 65/35 ratio.

Even more changes have been made from a risk standpoint among loan officers.

“We have gotten away from volume goals and put some profitability goals in there,’’ he said, adding that there’s an 18-month time period to get paid the full incentive package.

Even though the bank is not a recipient of Troubled Asset Relief Program money from the federal government, it still follows TARP compensation guidelines. The bank conducts third-party annual reviews of its compensation plans, and has created a position for a chief risk officer who reviews compensation plans and makes recommendations to the risk committee of the board.

 “We have evolved from plans that were primarily paid in cash,’’ he said.

Todd Leone, a principal at McLagan compensation consultants in Minneapolis and a speaker at the conference, laid out some general trends, including:

  • The use of full value equity plans (such as restricted stock) continues to increase.
  • Most banks don’t use stock options as a form of equity compensation, no matter what the bank size is.
  • The larger the bank, the more frequent the use of equity compensation.
  • Banks are increasingly using credit quality measures in performance plans.

Bank CEO pay increased last year as the economy strengthened and bank balance sheets improved, although most of the increases were tied to cash and equity incentives, Leone said. The biggest pay increases were for CEOs at the largest banks, who saw their paychecks drop substantially in 2008 and 2009 following the financial crisis. The median cash compensation for big bank CEOs is now roughly what it was in 2006, $2.3 million, according to McLagan’s analysis of 717 publicly traded bank proxy statements, 41 of them banks with more than $15 billion in assets.

The following table shows the breakdown in CEO pay last year:

Median 2010 CEO Compensation

comp-mclagan.png

*Cash compensation is salary plus all other cash incentives, like bonuses. Direct comp is  cash compensation plus equity. Total compensation adds direct compensation, retiree benefits and all other compensation.

Source: McLagan

So, you thought you were done with TARP? Post-repayment compensation surprises.

Written by


ball-chain.jpgDon Norman and Andy Strimaitis, partners in Chicago-based law firm Barack Ferrazzano who specialize in executive compensation matters for financial institutions, will be speaking at Bank Director’s compensation conference November 8-9 in Chicago.  Here, they discuss the legacy issues from the TARP compensation limits that may remain after repayment of TARP funds.

###

When a banking organization participating in Treasury’s Troubled Asset Relief Program, better known as TARP, considers repayment, it is commonplace to presume that the organization will be free from the shackles of various compensation limitations, governance rules and reporting requirements that applied during the TARP period. Unfortunately, upon closer examination, it becomes apparent that several areas will require ongoing vigilance to ensure full compliance with the TARP rules.

Generally, following the repayment date, the organization and its employees will no longer be subject to the TARP rules with respect to future compensation decisions (i.e., with respect to time periods following the repayment date).  There are, however, a few important exceptions and distinctions to note with respect to this general rule.

Bonus Restriction.  Even after the repayment date, an organization will continue to be prohibited from paying to, or accruing on behalf of, any employee who was subject to the bonus prohibition any bonus, retention award or incentive compensation with respect to the time period during which that employee was subject to the TARP bonus restriction.  This is supported by an interpretive letter from the Secretary of the Treasury Timothy F. Geithner to Elizabeth Warrren, then-chairman of the Congressional Oversight Panel, dated February 16, 2010, concerning certain aspects of the TARP-related executive compensation restrictions.

For example, assume that for 2011, Joe Smith is the highest paid employee of XYZ, Inc. (based on 2010 compensation).  Further, assume that XYZ, Inc. repays 100 percent of its TARP funds on June 30, 2011.  In determining annual bonuses for 2011, XYZ, Inc. could pay to, or accrue on behalf of, Joe Smith a bonus with respect to the performance period from July 1, 2011 through December 31, 2011.  However, even though its TARP funds have been repaid, it could not pay to, or accrue on behalf of, Joe Smith a bonus with respect to the performance period from January 1, 2011 through June 30, 2011. 

The same treatment also applies to equity awards that were granted during the TARP period and after February 17, 2009, to employees who became subject to the bonus prohibition during a year following the year of grant (these awards would not be qualified “long term restricted stock” awards, as they would have been granted to employees not subject to the bonus prohibition).  In this case, while the employee was subject to the bonus prohibition, the employee could not continue to vest in the equity award.  Once the employee is no longer subject to the bonus prohibition (because TARP was repaid, or the employee was no longer one of the highly compensated employees subject to the prohibition), the employee cannot “catch up” the vesting that was tolled during the bonus prohibition period.  Thus, an equity award that may have had a five-year vesting period, will now have a total vesting period equal to five years plus the period the employee was subject to the bonus prohibition.

Severance Restriction.  Pursuant to the TARP rules, a “golden parachute” payment (i.e., severance) is considered to be made at the time of termination rather than at the time of payment.  As such, after the TARP repayment date, an organization cannot revisit a termination that occurred during the TARP period and make a severance payment or provide other post-termination benefits to an employee who left the company while subject to the TARP severance restriction. 

Deduction Limitation.  A TARP participant is also prohibited from deducting, with respect to its “senior executive officers,” more than $500,000 of compensation expense per year during the TARP period.  Under the TARP rules, the deduction limitation applies to currently available compensation as well as deferred compensation earned during the TARP period.  As such, an organization participating in TARP is obligated to continue to track, post-TARP repayment, the deduction limitation with respect to compensation earned during the TARP period even if those amounts are paid after the repayment date. 

Reporting Requirements.  After the end of the year that includes the TARP repayment, the organization will be required to submit its annual PEO/PFO and compensation committee certifications, risk assessment analysis and narrative and other disclosures with respect to the period preceding the repayment date.  For public companies, this will include attaching the PEO/PFO certifications to the annual Form 10-K and also including the compensation committee certification and narrative summary in the annual proxy statement.  For public and private organizations, all required disclosures will also have to be submitted to the Treasury electronically, and in some cases, to the organization’s primary federal regulator.

Banks (don’t) like Small Business Lending Fund

Written by


smb-loan.jpgI previously wrote about the Small Business Lending Fund in this blog, but the fund drew as much interest as raw broccoli at a children’s birthday party.

Congress created the $30 billion fund to provide capital to banks and increase lending to small business, but as of Monday, a little more than 600 banks applied for only $8.6 billion, according to Treasury spokeswoman Colleen Murray.

Those numbers disguise the fact that about 2,000 banks are S corporations or mutual companies and haven’t had a chance to apply yet because the Treasury hasn’t given them a term sheet.

So as the Wall Street Journal reported last week, the fact that only 7 percent of all banks actually applied by the end of March deadline is not as pathetic as it looks.

The U.S. Treasury has extended the deadline for banks to apply from the end of March to May 16 and will issue term sheets within weeks for S corporations and mutuals, Murray said.

She said the Treasury expects applications for the program to start flowing in, and there’s a real need for capital on the part of small business.

Still, there’s a lot of hesitancy among banks. Those that have Troubled Asset Program Relief capital can refinance into the Small Business Lending Fund and potentially save money on dividends to the government, as long as they increase lending.

But for banks that didn’t have TARP money, there is less of an incentive to apply.

Banks that have CAMELS 4 or 5 ratings aren’t eligible, either.

Plus, “many banks concluded there wasn’t sufficient enough growth opportunities to warrant taking on that type of capital,’’ said Richard Maroney, co-head of investment banking for Austin Associates. Although the dividends banks must pay on the capital start low, they can rise as high as 9 percent for banks that don’t increase small business lending after four and a half years (although banks can repay the capital and avoid the higher dividend).

Plus, bankers are wary the federal government could change the rules on them. There is, indeed, a good amount of political pressure surrounding the program.

Congresswoman Sen. Olympia Snowe, R-Maine, for example, introduced a bill last month saying the program lacked “transparency and accountability.” The bill would make it impossible for the fund to give money to banks that had TARP money.

“I think there is still a taint from TARP,’’ Maroney said. “I had a number of clients who said they were hesitant to deal with the government.”

Where is all the bailout fraud?

Written by


fraud.jpgNeil Barofsky stepped down this week as the official watchdog for the $700 billion Troubled Asset Relief Program, a safety net for just about everyone during the financial crisis, from banks to car companies to homeowners. As the special inspector general for the Troubled Asset Relief Program (STIGTARP), Barofsky has done a great deal to highlight problems and pinpoint areas for improvement.

He has repeatedly criticized the U.S. Treasury, for example, for its handling of the TARP Home Affordable Modification Program, which failed to live up to its lofty goal of saving three million to four million households from foreclosure.

But in one respect, Barofsky takes a little too much credit.

He said in its last quarterly report to Congress in January that his organization had 142 ongoing criminal and civil investigations, resulting in 13 criminal fraud convictions.

But none of the law enforcement investigations described in the report relate to any taxpayer dollars stolen. Two of the companies mentioned, The Shmuckler Group and Residential Relief Foundation, were accused of swindling homeowners by promising to modify mortgages in exchange for fees. (The Home Affordable Modification Program does try to help struggling homeowners modify mortgages through their banks, but without any upfront fees for homeowners).

Another case is the prosecution of bank officers for Colonial Bank and mortgage lenders Taylor, Bean & Whitaker. Prosecutors believe Colonial Bank tried to obtain $550 million in TARP program money using fraudulent mortgages cooked up by officers at Taylor, Bean & Whitaker, according to The New York Times. (The case is ongoing). Again, no TARP money was obtained by the bank, but The New York Times says the case got started when STIGTARP became suspicious of the size of the bank’s TARP application.

In another case, Gordon Grigg, who is now serving a 10-year prison term, was convicted in Nashville, Tennessee, of stealing at least $6 million from investors. Grigg promised at least one investor he could invest in TARP-related debt, although no such investment opportunity exists. I was a reporter covering a press conference in Nashville in 2009 when Barofsky flew in from Washington, D.C. to join federal and local law enforcement officials announcing the charges against Grigg. It was advertised as the first TARP-related fraud case, and it got national media attention.

Again, no actual TARP money was involved.

Still, the law enforcement end of STIGTARP presses on. The watchdog agency has 45 armed officers and 27 vehicles equipped with lights and sirens, and recently asked Congress for additional money to upgrade vehicles, according to a recent CNBC story.

A spokeswoman for STIGTARP, Kris Belisle, confirmed that report and said the agency has been successful in stopping people from using TARP money fraudulently. 
That may be the case. But after more than two years of TARP, it’s surprising the lack of fraud using taxpayer dollars disclosed so far by all these armed investigators. Is that because none exists, or is that because we haven’t found it?

TARP Legacy: Hidden Costs

Written by


The U.S. Treasury reported this week that taxpayers will make a $20 billion profit from the Troubled Asset Relief Program for banks, the government’s emergency support during the financial crisis.

That’s because banks have been paying dividends to the government on what was essentially borrowed capital and now 99 percent of the funds have been paid back.
 
The latest banks to pay back TARP, as announced this week, were Cincinnati’s Fifth Third Bancorp; Boyertown, Pa.’s National Penn Bancshares; Rapid City, South Dakota’s Stockmens Financial Corp.; San Jose, California’s Bridge Capital Holdings; and Norfolk, Virginia’s Heritage Bankshares.

Separately, the Congressional Budget Office has brought down its estimate of the total cost of TARP to taxpayers, which included investments in automobile manufacturers and insurer AIG, down to $25 billion, must less than the $356 billion the budget office previously estimated.

Winding down its work this week, the Congressional Oversight Panel for TARP released its final report on the program, saying TARP helped avert an even worse financial meltdown, which has become a pretty standard line for economists on both sides of the political aisle.

The Congressional Oversight Panel said: “The TARP does not deserve full credit for this outcome, but it provided critical support to markets at a moment of profound uncertainty. It achieved this effect in part by providing capital to banks but, more significantly, by demonstrating that the United States would take any action necessary to prevent the collapse of its financial system.”

The report goes on to criticize TARP as well, saying part of the reason the program has cost so little is because some of it didn’t work. For instance, the home affordable modification program (HAMP) was designed to lose money and benefit three to four million homeowners, but the U.S. Treasury hastily crafted it, and relied on voluntary participation from mortgage servicers.

“The program now appears on track to help only 700,000 to 800,000 homeowners,’’ the Congressional Oversight report says.

Also, TARP probably cost less than expected because of other government aid to the economy, the report says.

Plus, TARP leaves an even bigger problem on the table: the problem of moral hazard, the report says.

“By protecting very large banks from insolvency and collapse, the TARP also created moral hazard: very large financial institutions may now rationally decide to take inflated risks because they expect that, if their gamble fails, taxpayers will bear the loss. Ironically, these inflated risks may create even greater systemic risk and increase the likelihood of future crises and bailouts.”

The Congressional Oversight Panel is not the only one to bring up this problem. Many economists have been calling attention to the same issue. Whether the topic will resonate with the American public, still reeling from high unemployment, remains to be seen.

Small business loan fund seems like a ‘no-brainer’ for bankers

Written by


The Small Business Lending Fund may be that gift from Congress to bankers they never expected.

After months of gridlock, legislators passed a small business bill last September that included $30 billion for small business loans.

Banks with less than $10 billion in assets can apply to the U.S. Treasury for the capital, and then use the money to lend to small businesses, as a way to generate relief for the economy. The reason it is so great for banks is that many of them still are saddled with Troubled Asset Relief Program money (TARP) and they are having a tough time raising capital, especially smaller, community banks.

This new fund will give them a chance to refinance out of TARP, save money in dividends paid to the government, and have the new money count toward Tier 1 capital to satisfy regulators. Even banks without TARP money can apply.

“It’s a no brainer,’’ said Christopher Annas, the president and chief executive officer of Meridian Bank in Devon, Pennsylvania.

His $400 million-asset bank would reduce dividends from $600,000 to $125,000 per year, by refinancing out of TARP into the small business fund.

The dividend rate on the new fund is from 1 percent to 5 percent, depending on how much the bank increases lending to small business. Banks that increase lending by less than 2.5 percent will pay 5 percent dividends on the fund. Banks that increase lending by more than 10 percent pay 1 percent. In contrast, banks must pay TARP dividends of 5 percent, no matter how much they increase lending.

Even the potential drawbacks of the new program seem hard to find. For instance, banks have two years to increase their lending to small businesses before they start paying penalties. With penalties, the rate is no more than 7 percent or 9 percent—and the higher amount is if lending doesn’t increase after four and a half years.

The banks are free to pay back the Small Business Lending Fund money at any time, without penalty.

So if it doesn’t work out, no worries.

“If you don’t need the capital right now, take it, you can use it next year,’’ Annas said.

If a bank is having trouble raising capital, the fund could equate to “deferring your capital raise for two or three years,’’ said Richard Maroney Jr., who co-manages the investment banking division of Austin Associates in Toledo, Ohio, and spoke at Bank Director’s Acquire or Be Acquired conference in Scottsdale, Arizona recently.

With 1 percent to 5 percent dividend rates, “over time, you could say that’s a pretty good cost of funds,’’ he said.

For instance, if a bank takes $10 million in small business lending money, refinances out of TARP and reduces its dividend from 5 percent to 1 percent, that’s a savings of $400,000 per year, Maroney said.

There are some requirements though:

  • Any bank, thrift or bank holding company applying for the funds must have assets of less than $10 billion.
  • The deadline to apply is March 31. However, there is no obligation to take the funds if applying.
  • Each loan commitment can’t be more than $10 million.
  • The loans must be given to businesses that make annual revenues of less than $50 million. Commercial and industrial loans are included. So are owner-occupied real-estate backed commercial loans and agriculture loans. SBA and other government-backed loans are excluded (no double dipping allowed).
  • Reporting requirements include quarterly confidential statements to the U.S. Treasury and a two-page report to the primary regulator.

Wilmington Trust blunders on CEO Pay

Written by


pencil.jpgIt’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/