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Monthly Archives: December 2009

News Roundup — December 1, 2009 to December 22, 2009

By Stan Santos - Tuesday, December 22, 2009

Consumer Financial Protection Agency

On December 11, 2009, the U.S. House of Representatives approved sweeping new legislation to modernize America’s financial rules in response to the current recession. HR 4173, the Wall Street Reform and Consumer Protection Act, passed by a vote of 223 to 202 and includes a comprehensive set of reforms that addresses many of the problems that the nation faces today. Among the various actions facilitated by the bill, if signed into law, the Act would create the Consumer Financial Protection Agency and establish an orderly process for shutting down large, failing financial institutions that are deemed “too big to fail”.

Broox Peterson presents a short opinion piece on HR 4173. Whether the Senate version will survive intact is anyone’s guess. An article highlighting Sen. Christopher Dodd‘s (D-CT) sponsorship of the bill appeared on National Public Radio on November 10, 2009.

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November TARP Capital Infusions – TARP Map and List of Recipients Updated

By Dustin Hall - Wednesday, December 16, 2009

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. 

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Treasury Clarifies Interim Final Rule regarding TARP Executive Compensation Limitations

By Rob Klingler - Monday, December 14, 2009

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.

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Summary of Federal Reserve Proposed Compensation Guidance

By Jennifer Faucett - Monday, December 14, 2009

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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TARP Extension – Capital for Community Banks?

By Rob Klingler - Thursday, December 10, 2009

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.

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Process for Requesting Determination of “High-Rate Area”

By Rob Klingler - Wednesday, December 9, 2009

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.

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