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 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.

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.

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On October 21, 2009, President Obama announced the broad outlines of a new program to provide additional capital to community banks in an effort to spur lending to smaller business.

Actual facts about the new program are currently very sparse.  A review of the currently available information does provide some details that may be attractive to community banks that current have TARP CPP funds, as well as those that currently do not have funds.  However, it does not appear that there will be any change in the Treasury’s determination of which community banks are eligible for TARP funds; participating institutions appear to still need to be viable without the funds.

There are three basic sources of official information:

1. the text of President Obama’s speech in Landover, Maryland;
2. the press release announcing the speech; and
3. a fact sheet on the President’s Small Business Lending Initiatives.

Known Facts

• The funds will be available to “viable banks with less than $1 billion in assets.”  The announcement does not give any indication that the Treasury will alter its existing viability standards.
• Participants will be required to submit a small business lending plan explaining how the additional capital will allow them to increase lending to small businesses, and will be required to submit quarterly reports detailing their small business lending activities.
• The initial dividend rate will be 3% rather than the 5% required under the current TARP Capital Purchase Program.  The dividend will rise to 9% after five years, consistent with the existing TARP Capital Purchase Program.  Presumably, Subchapter S institutions will receive a comparable reduction in the rate paid on the subordinated debt.
• The amount of capital is limited to 2% or the institution’s risk-weighted assets.  This is less than the 3% permitted under the existing TARP Capital Purchase Program, and less than the 5% currently permitted for institutions that are less than $500 million in total assets.
• The Treasury is working to finalize program terms “in the coming weeks.”
• The Treasury will also determine how to handle existing Capital Purchase Program participants to allow them to replace existing capital with investments under the new program (effectively reducing their dividend costs in exchange for a commitment to increase small business lending).
• Community Development Financial Institutions (CDFIs), including CDFI credit unions, will be able to apply for funds with a dividend rate of 2% for eight years, after which it will increase to 9%.

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During the month of September, the Treasury completed rounds forty-two, forty-three, forty-four, and forty-five of TARP Capital infusions.  In these four rounds, which closed on September 4, September 11, September 18, and September 25, respectively, the Treasury purchased a total of approximately $141 million in securities from 14 financial institutions.  Through September 2009, the Treasury had invested in 687 institutions, totaling approximately $204.6 billion.

In these four rounds, Community Bancshares of Mississippi, Inc., Brandon, Mississippi, received the largest infusion, $52 million, and State Bank of Bartley, Bartley, Nebraska, received the smallest infusion, $1.7 million. 

During September, seven financial institutions re-paid their TARP capital investments: Valley National Bancorp ($125 million (approximately 42% of the initial investment)), Centerstate Banks of Florida ($27.9 million), Wesbanco Bank, Inc. ($75 million), Manhattan Bank ($1.7 million), CVB Financial Corp. ($32.5 million (25% of the initial investment)), F.N.B. Corporation ($100 million), and Westamerica Bancorporation (approximately $42 million (50% of initial investment)).  Valley National and CVB Corp. had already re-paid a portion of their TARP investments, and Valley National still has $100 million remaining.  As of the end of September, 2009, 42 financial institutions had re-paid all, or some portion, of their TARP Capital investment, bringing the total amount re-paid to approximately $70.7 billion.  At the end of September 2009,  Treasury’s outstanding investment equaled approximately $133.9 billion.

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We have recently become aware that the OCC is reviewing national bank TARP recipients for their compliance with TARP requirements as part of the formal examination process.  As of part of the examination, the OCC is requesting to review certain documents, policies, and other information related to areas impacted by the TARP regulations.  In particular, the OCC will review a TARP recipient’s Luxury Expenditure Policy, as well as other compensation-related information.

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On August 19, 2009, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) published its latest Audit Report, titled “Despite Evolving Rules on Executive Compensation, SIGTARP Survey Provides Insights on Compliance.” The Report summarizes the results of SIGTARP’s survey of the first 364 TARP CPP recipients, focusing on their executive compensation responses. (SIGTARP previously published its Audit Report on the responses related to the use of TARP funds.)

In the aggregate, the responses are not particularly insightful.  As noted in the Report’s conclusion:

Since EESA was enacted on October 3, 2008, the legislation and implementing guidance on executive compensation for TARP recipients have been in flux.  Nevertheless, most CPP recipients report that they have made a concerted effort to comply with executive compensation limitations.  Moreover, many institutions reported that they intend to comply with the additional restrictions on executive compensation enacted under ARRA.  Nonetheless, some recipients voiced concerns about the new restrictions; in particular, they noted a need for further Treasury guidance or regulations to implement ARRA executive compensation limits.”

However, in addition to the Audit Report itself, SIGTARP has published redacted copies of all of the SIGTARP survey responses.  Responses are listed both alphabetically, and by state.

During the month of August, the Treasury completed rounds thirty-eight, thirty-nine, forty, and forty-one of TARP Capital infusions.  In these four rounds, which closed on August 7, August 14, August 21, and August 28, respectively, the Treasury purchased a total of approximately $130 million in securities from 9 financial institutions.  Through August 2009, the Treasury had invested in 673 institutions, totaling approximately $204.5 billion.

In these four rounds, U.S. Century Bank, Miami, Florida, received the largest infusion, $50 million, and Bank Financial Services, Inc., received the smallest infusion, $1 million. 

During August, three financial institutions re-paid their TARP capital investments: CVB Financial Corporation ($97.5 million (75% of the initial investment)), Bancorp Rhode Island, Inc. ($30 million), and State Bankshares, Inc. ($12.5 million (25% of the initial investment)).  As of the end of August, 2009, 37 financial institutions had re-paid all, or some portion, of their TARP Capital investment, bringing the total amount re-paid to approximately $70.3 billion.  At the end of August 2009,  Treasury’s outstanding investment equaled approximately $134.2 billion.

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The deadline for TARP CPP recipients who received capital infusions prior to June 15, 2009 are required to have adopted an Excessive or Luxury Expenditures Policy by Monday, September 14, 2009.  In addition to adopting such a policy, TARP CPP recipients are required to submit the policy to Treasury and their primary federal banking regulator, and post the policy on their website.  (Subsequent TARP CPP recipients are required to adopt and post a policy within 90 days after the completion of their capital infusion.)

We have collected a list of posted Excessive or Luxury Expenditure Policies.  This list is complied for informational purposes only to offer examples, and is not intended to be complete list of posted policies.  In addition, we may not identify when a bank has filed a revised policy.  Inclusion (or exclusion) from the list does not represent a recommendation of any policy.  Clients of Bryan Cave should contact us to further discuss an appropriate Excessive or  Luxury Expenditures Policy.

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On August 27, 2009, the Treasury’s Inspector General released its audit report on the approval of City National Corp.’s receipt of $400 million in TARP Capital Purchase Program funds.  The report concludes that City National met the required criteria to receive funding, and that the OCC and Treasury followed the policies and procedures in place at that time for approving City National.

Unlike prior reports, the Appendix to the Treasury’s Inspector General report explicitly provides that acceptable performance ratios for TARP CPP recipients:

• Classified Assets/Net Tier 1 Capital plus Allowance for Loan and Lease Losses (ALLL) ratio of less than 100 percent;
• Non-Performing Loans plus Other Real Estate Owned/Net Tier 1 Capital plus ALLL ratio of less than 40 percent; and
• Construction and Development Loans/Total Risk-Based Capital ratio less than 300 percent.