Posts filed under ‘TARP’

President Announces Community Bank Program to Increase Credit Flow to Small Businesses

The President announced plans today that, if put into action, would lead to the realization of at least some much-needed and long-sought-after assistance for community banks.  A copy of the President’s announcement is available here. (Skip to Page 2 for Details).

According to the President’s proposal, which is part of the White House’s “Financial Stability Plan,” the program would target small business lending, but would also offer a mechanism for banks with less than $1 billion in assets to access capital with an annual dividend rate of 3%.  The announcement is short on specifics, but here are the basics:

(1) Banks will receive capital in an amount equaling up to 2% of risk-weighted assets; 

(2) The annual dividends on the capital will equal 3% for the first five years and 9% thereafter; and 

(3) Banks seeking to participate in the program will submit a “small business lending plan” in which the bank explains how additional capital will help increase its lending to small businesses.  (Banks approved for the program that elect to participate will also be required to follow up with quarterly reports detailing small business activities).

Over the next few weeks, Treasury will work with community banks and the small business community to hammer out the program’s specifics.  Notably, the release contemplates that banks already participating in the capital purchase program will be able to replace existing capital, which carries a 5% dividend (7.7% for S-Corps), with investments under the new program.   

 The President also announced support for legislation that would increase the size of key Small Business Administration (SBA) loans. The aim of the increase would (supposedly) allow the SBA to ensure that more small businesses can get access to credit.

 The first prong of the proposed legislation would increase the Maximum 7(a) loan from $2 million to $5 million, providing greater access to capital that businesses could use to boost working capital as well as purchase machinery equipment and real estate.  

The second prong of the proposed legislation would increase the maximum 504 project loan from $2 million to $5 million for standard borrowers (supporting a total project of $12.5 million) and from $4 million to $5.5 million for manufacturers (supporting a total project of $13.75 million), thereby increasing the qualifying borrowers’ ability to undertake larger projects.

And the third prong of the proposed legislation would increase the maximum loan size of the SBA microloan programs from $35,000 to $50,000.

October 21, 2009 at 10:11 pm Leave a comment

Treasury Releases Executive Compensation Restrictions for TARP Participants

The U.S. Treasury Department has released an Interim Final Rule (the Executive Compensation Rule) establishing governance and compensation standards for institutions participating in the Troubled Asset Relief Program (TARP).  Any institution participating in the TARP Capital Purchase Program is subject to these rules so long as any obligation to Treasury remains outstanding.  Review the press release announcing the IFR, and review the entire IFR.

Some of the IFR’s most important provisions include the following: 

  • Limitations on the amounts and types of bonuses payable to senior executive officers and other highly compensated employees.
  • A ban on golden parachute payments—a term that reaches much farther than most people think, including almost any type of compensation received upon a covered employee’s departure from the institution.
  • A “clawback” provision that requires an institution to recover any bonus, retention award or incentive compensation paid to a covered employee if the bonus, retention award or incentive compensation was paid in reliance on inaccurate financial information.   
  • Several corporate governance and board certification requirements, including a requirement for perquisite disclosures and for implementing luxury expense controls.       
  • A requirement for all TARP participants to provide shareholders with an annual, non-binding vote on the compensation of the institution’s executives.   
  • An affirmation that the rule’s restrictions will not apply to institutions receiving indirect financial assistance from UST, such as institutions receiving loans from the Term Asset Loan Facility.

If your institution is currently participating in any TARP program, you are required to comply with these rules. The following initial steps should help:

  • Identify which of your employees will be subject to which restrictions.  The number of employees covered by a given restriction varies depending on the type of restriction and the amount of Capital Purchase Program funding the institution has received.
  • Review your institution’s employment and other compensation-based agreements, especially severance provisions, to verify that they comply with the IFR.  
  • Designate appropriate board committees to confer with the institution’s senior risk officers to identify compensation policies that may encourage unnecessary risk taking.

June 12, 2009 at 4:23 pm Leave a comment

Economic Stimulus Legislation Adds to Executive Compensation Restrictions for TARP Participants

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA).  While many aspects of this “stimulus” legislation have been debated publicly for weeks, new executive compensation restrictions for financial institutions participating in the Troubled Asset Relief Program (TARP) were inserted just one day before the final congressional vote took place.  Unlike the Secretary of Treasury’s February 4th revisions to the TARP executive compensation rules, which are not retroactive, these new executive compensation restrictions will apply to all TARP participants, including those that have already received funding under TARP.  Here is a brief overview of these new restrictions.  

Restrictions on Golden Parachute Payments. ARRA bans any “golden parachute payment” to a TARP participant’s senior executive officers or any of the institution’s next five most highly-compensated employees for the entire period in which Treasury holds the institution’s preferred shares.  ARRA defines “golden parachute payment” broadly, covering any payment for departure from an institution for any reason, except for payments for services performed or benefits accrued.

This provision clearly targets the handsome severance packages received by chief executives at large, failing financial institutions.  Unfortunately, the law does not distinguish between such packages and standard retirement packages received by most workers in the broader economy.  Hopefully, in his rules implementing this provision, the Secretary of the Treasury will provide for such a distinction in his interpretation of the exception for “services performed or benefits accrued.”

Restrictions on Incentive Compensation.  Employees subject to ARRA’s incentive compensation restrictions will be banned from receiving or accruing any bonus, retention award or incentive compensation, other than long-term restricted stock (in an amount that does not exceed 1/3 of the executive’s total annual compensation and does not fully vest until the government is repaid) for as long as the U.S. Treasury holds preferred shares of his or her employer.  (more…)

February 20, 2009 at 4:58 pm Leave a comment

TARP Application Deadline Looms for S-Corporations

On January 16, 2009, the U.S. Treasury issued a term sheet (Term Sheet) setting forth terms for financial institutions operating under Subchapter S of the Internal Revenue Code (S-Corps) to participate in the TARP Capital Purchase
Program (CPP). S-Corps desiring to participate in the CPP must file their applications by Friday February 13, 2009. A copy of the application can be downloaded. (Ignore the application deadline date printed on the form).

Here is a quick overview of how the CPP works for S-Corps:

  • Security Type: Unlike previous CPP transactions, S-Corps will not sell preferred stock to Treasury. Instead, participating S-Corps will issue subordinated debentures, referred to in the Term Sheet as “Senior
    Securities.”
  • Key Terms: Each debenture representing a Senior Security will be issued in the principal amount of $1000, will require quarterly interest payments at a rate of 7.7% per annum for the first five years the securities are
    outstanding and 13.8% thereafter and will carry a maturity date of 30 years. (These interest rates are higher than the dividend rates payable under previous CPP transactions. Treasury increased the rate for S-Corps to offset the fact that interest payments are tax-deductible but dividends are not.)
  • Dividend Restrictions: No dividends on shares of equity or trust preferred securities may be paid while an interest deferral is in effect. For the first three years of participation, Treasury must consent to any
    increase in the participant’s regularly paid common dividends. After the third year, Treasury must consent to any dividend increase that exceeds an amount equal to 103% of the prior year’s dividend. However, Treasury’s consent is not required for any dividend increase if the increase is proportionate to the increase in the financial institution’s income, and the increased dividends are distributed to shareholders to pay increased income tax liabilities.
  • Executive Compensation: The senior executive officers of S-Corps participating in CPP will be subject to the executive compensation provisions in EESA and its implementing regulations.Review the S-Corp Term Sheet in its entirety.

(more…)

February 9, 2009 at 5:09 pm Leave a comment

Now We have Teeth—Additional Restrictions on Executive Compensation Under TARP

On February 4, 2009, the Treasury Department amended its executive compensation restrictions for financial institutions receiving “exceptional assistance” prompted by the current economic crisis and proposed additional restrictions for participants in generally available capital access programs. The new administration made clear that it wants to remove the opportunity for executives participating in these programs from benefiting personally. “Exceptional assistance” and “generally available capital access programs” are discussed below.

Material changes are as follows:

  • Compliance and Certification. Each CEO of any institution receiving government bailout funds must certify that the institution has strictly complied with statutory, Treasury, and contractual executive compensation restrictions. Each compensation committee must also provide an explanation of how compensation arrangements do not encourage excessive and unnecessary risk.
  • Institutions Receiving “Exceptional Assistance.” Institutions receiving “exceptional assistance” are now retroactively subject to the following additional restrictions:
    • $500,000 cap on each senior executive’s total compensation, instead of merely a tax deduction limit;
    • The only other allowed compensation for senior executives is restricted stock or similar long term incentive plans which limit vesting until after: (a) full repayment to the government or (b) a waiting period taking into account repayment and the interests of taxpayers;
    • Executive compensation structure and strategy must be fully disclosed and is subject to non-binding “say on pay” shareholder resolutions;
    • Now mandatory clawback of bonuses includes top 25 senior executives (rather than top five) who knowingly participated in providing inaccurate (a) information relating to financial statements or (b) performance metrics used to calculate their own incentive pay;
    • Golden parachute ban applies to the top 10 senior executives (rather than top five) and the next 25 executives cannot receive severance of more than one year’s compensation; and
    • The Board must adopt a company-wide policy on luxury expenditures, such as aviation services, entertainment and holiday parties, or conferences, and require certification by the CEO for expenditures that may be viewed as excessive or luxury.
  • Proposed Restrictions for Participants in Generally Available Capital Access Programs. Additionally, the Treasury intends to issue new restrictions for institutions participating in “generally available capital access programs.” The proposed changes, which will not apply retroactively to existing investments or programs already announced, are similar to those in effect for institutions receiving “exceptional assistance.”
  • Long-Term Regulatory Reform: Compensation Strategies Aligned with Proper Risk Management and Long-Term Value and Growth. Finally, the Treasury is reviewing measures to move regulations beyond those that regulate compensation strategies related only to top executives to regulations focused on how company-wide compensation strategies encourage excessive risk-taking.
  • Exceptional Assistance Versus Generally Available Capital Access Programs
    • Institutions that participate in “exceptional assistance” programs are those that need more assistance than the general programs provide. Some examples of these institutions are AIG, Bank of America and Citigroup.
    • Institutions that participate in “generally available capital access programs” are not entitled to special terms, but receive assistance based on terms available to all recipients, including the terms regarding limitations on the amount received and repayment. An example of this type of program is the Capital Purchase Program.

To read the official press release on these changes, please click here.

February 2, 2009 at 3:38 pm Leave a comment

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