During the month of November, the Treasury completed rounds forty-nine, fifty, and fifty-one of TARP Capital infusions. In these three rounds, which closed on November 6, November 13, and November 20, respectively, the Treasury purchased a total of approximately $38 million in securities from 7 financial institutions (3 of which previously received a TARP capital infusion). Through November 2009, the Treasury had invested in 696 institutions, totaling approximately $204.7 billion.
In these three rounds, Presidio Bank, San Francisco, California, received the largest infusion, $10 million, and Community Pride Bank Corporation, received the smallest infusion, $4.4 million.
Of note during the month of November, F&M Bancshares, HPK Financial Corporation, and Metropolitan Capital Corp., joined WashingtonFirst Bankshares, Inc. as institutions to receive a second investment from Treasury in connection with the TARP expansion for community banks. F&M Bancshares received an additional $3.5 million and had already received $4.6 million; HPK Financial Corporation received an additional $5 million and had already received $4 million; and Metropolitan Capital Corp. received an additional $2.4 million and had already received $2 million.
During November, nine financial institutions (one of which had already re-paid a portion of its funds) re-paid their TARP capital investments: Bank of Ozarks, Inc. ($75 million), LSB Corporation ($15 million), Wainwright Bank & Trust ($22 million), Union Bankshares Corp. ($59 million), Midwest Regional Bancorp, Inc. ($700,000), 1st United Bancorp, Inc. ($10 million), Magna Bank ($3.5 million, approximately 25% of the outstanding amount), Frontier Bancshares, Inc. ($1.6 million), and Westamerica Bancorporation ($41.9 million, completing its repayment). As of the end of November, 2009, 53 financial institutions had re-paid all, or some portion, of their TARP Capital investment, bringing the total amount re-paid to approximately $71 billion. At the end of November 2009, Treasury’s outstanding investment equaled approximately $133.7 billion.
As discussed in another post, TARP has been extended until October 3, 2010.
On December 7, 2009, the Treasury Department published corrections to the preamble and certain provisions of the interim final rules regarding TARP Standards for Compensation and Corporate Governance.
The amendments are generally technical in nature and are designed to clarify certain ambiguities in the original interim final rule and to conform the certification language to reflect the deadlines generally set forth in the regulation and to correct certain cross-references.
The two most important clarifications relate to the identification of most highly compensated employees and the applicability of the “say on pay” requirements.
With regard to the identification of the most highly compensated employees, the correcting amendments make clear that the senior executive officers should NOT be excluded from determinations of the most highly compensated employees. The rule also makes clear that senior executive officers should not be double-counted; if a provision is applicable to the senior executive officers and a certain number of the most highly compensated employees of the TARP recipient, the senior executive officers (because they are already subject to the provision) are excluded for purposes of determining the most highly compensated employees that are also subject to the provision. Accordingly, for TARP recipients that received less than $25 million in Capital Purchase Program funding, the prohibition on the payment or accrual of bonus will apply only to the most highly compensated employee (regardless of whether such employee is a senior executive officer).
The correcting amendments also make clear that private companies are not subject to the requirement to provide shareholders a “say on pay.” Only TARP recipients otherwise subject to SEC regulation are required to provide shareholders with a nonbinding resolution on executive compensation.
On October 22, 2009, the Federal Register published proposed guidance from the Federal Reserve for structuring incentive compensation arrangements at banking organizations.
There are several notable aspects of the proposed guidance. First, the Federal Reserve expects all banking organizations, not just entities participating in the Troubled Asset Relief Program, to review their incentive compensation arrangements in light of the guidance. Second, the guidance sets forth principles that banking organizations should follow and implement as part of their incentive compensation arrangements, but does not establish pay caps or other specific formulas for calculating incentive compensation. Third, the principles in the guidance apply to incentive compensation arrangements for executives, employees, and groups of employees who may expose the organization to material amounts of risk. They are not limited to compensation arrangements for executive officers or other highly compensated employees.
Principles of a Sound Incentive Compensation System
The Federal Reserve guidance is centered on three (3) main principles that should be followed when designing a sound incentive compensation system.
Principle #1: Balanced Risk-Taking Incentives
- Incentive compensation arrangements should account for risks associated with employee’s activities when developing incentive compensation arrangements.
An incentive compensation arrangement should balance the risk and the reward associated with activities undertaken by the employee. This balance is achieved when incentive compensation paid to an employee accounts for the risks and the financial benefits associated with the employee’s activities. This may require banking organizations to reduce the amount of incentive compensation payable to an employee to account for the risks.
Example: Two employees generate the same amount of short-term profit, but the activities of one employee result in greater risk to the banking organization. Under a balanced incentive compensation arrangement, the employee whose activities result in a greater risk to the banking organization should receive less than the employee whose activities did not result in a greater risk to the banking organization.
- Employees should understand how risk and risk outcomes are accounted for in their incentive compensation arrangements.
Banking organizations should communicate clearly to employees how an incentive compensation arrangement will account for risk and risk outcomes. The communication should include examples and should be tailored to the employees.
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On December 9, 2009, Treasury Secretary Geithner exercised his discretion to extend the TARP program through October 3, 2010. In his letter to Congress certifying the extension, Geithner indicated that the Treasury Department would limit new commitments in 2010 to three areas:
- mitigating foreclosure;
- “recently launched initiatives to provide capital to small and community banks, which are important sources of credit for small businesses” (including additional efforts to facilitate small business lending); and
- increasing Treasury’s commitment to the Term Asset-Backed Securities Loan Facility (TALF).
The “recently launched initiatives to provide capital to small and community banks, which are important sources of credit for small businesses” presumably refers to the new capital program for community banks previously announced by President Obama on October 21, 2009. President Obama had indicated that the Treasury would be developing a program to provide TARP capital to community banks with less than $1 billion in total assets who committed to increase small business lending. The capital investment, as proposed, would be limited to 2% of risk-weighted assets and would carry a 3% dividend rate for the first five years. No indications were provided that the Treasury’s viability standard would be modified to permit additional banks to participate.
Secretary Geithner’s reference to this program is the first follow-up we’ve heard since Obama’s announcement. As recently as last week, local FDIC officials were telling us that the program appeared to be “dead on arrival” in DC, and there appeared to be little support in Washington for further developments. We understand the FDIC was advising interested banks to not anticipate any further action, and to seek capital elsewhere.
It remains to be seen whether Secretary Geithner’s letter to Congress represents a renewed interest in this program, merely a political statement indicating a focus on small business lending, or a simple preservation of flexibility going forward.
On December 4, 2009, the FDIC published Financial Institution Letter FIL-69-2009, which outlines the process for requesting a “high-rate area” determination by the FDIC to exempt the institution from compliance with the national rate caps. As we’ve previously discussed, financial institutions that are less than well capitalized will be barred from paying in excess of 75 basis points above the national rate unless the institution is able to persuade the FDIC that the institution’s local market rate is above the national rate. The new guidance confirms our previous understanding of the process the FDIC will use in approving high-rate areas, and provides additional clarify.
Less than well-capitalized institutions that operate in market areas where rates paid on deposits are higher than the “national rate” can request a “high-rate area” determination from the FDIC by sending a letter to the applicable FDIC regional office. The letter must identify the market area(s) in which the institution is operating. The FDIC appears willing to defer to the institution to identify its relevant market area, so long as it is a geographic area and does not arbitrarily exclude FDIC-insured institutions and branches operating in that geographic area.
The FDIC will use its own standardized data (average rates by state, metropolitan statistical area and micropolitan statistical area) to determine whether the institution is in a high-rate area. While the FDIC will not consider any specific supporting data offered by the institution, institutions may still want to calculate the expected market rate for various markets in determining whether to identify a larger or small relevant market area. The FDIC has specified that market areas may not consist only of a subset of banks with similar characteristics (such as asset size or retail focus) and cannot exclude branches of large institutions.
The FTC Postpones the Deadline for Red Flags Rule Compliance Again to June 1, 2010
In a last minute announcement, the Federal Trade Commission has indicated that it will delay the compliance date for the “Red Flags Rule” yet again. Affected businesses now have until June 1, 2010 to develop and implement a plan as required under the Red Flags Rule.
For more information, please read the client alert published by Bryan Cave LLP’s Consumer Protection Client Service Group on November 2, 2009.
EEOC Releases New Workplace Poster
The Equal Employment Opportunity Commission announced last week that it has revised and released for posting the notice that employers covered by federal anti-discrimination laws must display in the workplace.
For more information, please read the client alert published by Bryan Cave LLP’s Labor and Employment Client Service Group on November 2, 2009.
House Unveils Health Reform Bill
The U.S. House of Representatives has unveiled its health reform legislation. Among its provisions include an excise tax on medical devices that is expected to cost the industry $20 billion over the next ten years. The bill also requires device manufacturers to submit the product information to a national registry.
For more information, please read the client alert published by Bryan Cave LLP’s Food and Drug Administration Practice on November 3, 2009.
The FDIC has not yet formally published the anticipated guidance on how an institution can seek a “high-rate area” determination under the national interest rate restrictions for less than well-capitalized banks. However, based on conversations with FDIC officials, we understand that the FDIC is accepting requests that a bank be determined to be in a “high-rate area.”
We understand that the request should include a self-identification of the bank’s relevant market area. The FDIC will not set specified market areas, but rather will consider the market rate identified by the institution. Institutions are also encouraged to identify competing credit unions if the bank believes the credit union is relevant to deposit pricing in the market.
The request does not have to include analysis of the rates being paid in the market, as the FDIC will use its own data to calculate the average rate paid in the Bank’s identified market area. The FDIC will calculate the average rates paid in four standard types of deposit categories. If the market rate exceeds the national rate by at least 10% in three of the four categories, the FDIC will designate the Bank’s market area as a “high-rate area.”
We expect official guidance from the FDIC to be released shortly.
Standards for Prepaid Assessment Exemptions
We understand that the FDIC has decided to exempt the following categories of financial institutions from the requirement to prepay three years of deposit assessments:
- Institutions with a CAMELS rating of 4 or 5; and
- Institutions that are less than well-capitalized.
Institutions falling in either of these categories should have already received an electronic letter from the FDIC confirming that they have been exempted from the prepayment of deposit assessments.
On November 12, 2009, the FDIC adopted its final rule regarding prepaid assessments. The final rule is largely unchanged from the FDIC’s initial proposal; the most significant change is that the FDIC will now refund any unused assessments after collection of the amount due on June 30, 2013, as opposed to December 30, 2014.
Effect
As noted by the FDIC, the prepayment of FDIC assessments primarily impacts liquidity – both of the FDIC Deposit Insurance Fund and the banks. As the prepaid assessments merely represent the prepayment of future expense, they do not affect a Bank’s capital (the prepaid asset will have a risk-weighting of 0%) or tax obligations.
Given the higher FDIC assessments generally, and the elevated assessment rates for troubled banks, the prepayment of FDIC assessments could represent a significant cash outlay. The FDIC’s online assessment rate calculator includes a prepayment tab to help banks estimate their payments
Exemptions
The final rule provides that the FDIC, after consultation with the institution’s primary federal regulator, may exempt any institution from the prepayment requirement if it determines, in its sole discretion, that the prepayment “would adversely affect the safety and soundness of the institution.” The FDIC is required to provide notice to such institutions by Monday, November 23, 2009 if it has exempted the institution. We are aware that the FDIC started mailing exemption letters on November 12th.
The FDIC has not indicated the standards it will apply for exemptions. Based on the exemptions we’ve seen so far, it appears that all institutions subject to a formal enforcement action may be exempted.
During the month of October, the Treasury completed rounds forty-six, forty-seven, and forty-eight of TARP Capital infusions. In these three rounds, which closed on October 2, October 23, and October 30, respectively, the Treasury purchased a total of approximately $58 million in securities from 6 financial institutions (1 of which previously received a TARP capital infusion). Through October 2009, the Treasury had invested in 692 institutions, totaling approximately $204.7 billion.
In these three rounds, Premier Financial Bancorp, Huntington, West Virginia, received the largest infusion, $22 million, and Providence Bank, Rocky Mount, North Carolina, received the smallest infusion, $4 million.
Of note during the month of October, WashingtonFirst Bankshares, Inc. became the first insitution to receive a second investment from Treasury in connection with the TARP expansion for community banks. WashingtonFirst received $6.8 million on October 30, 2009 and had already received $6.6 million on January 1, 2009.
During October, three financial institutions re-paid their TARP capital investments: Flushing Financial Corp. ($70 million), Commerce National Bank ($5 million), and LCNB Corp. ($13.4 million). As of the end of October, 2009, 45 financial institutions had re-paid all, or some portion, of their TARP Capital investment, bringing the total amount re-paid to approximately $70.8 billion. At the end of October 2009, Treasury’s outstanding investment equaled approximately $133.9 billion.