Bank: Executive bonuses weren't funded by bailout

NORFOLK

When Hampton Roads Bankshares Inc. reported this month that it paid $925,000 to two former executives of Gateway Financial Holdings Inc. in the midst of a merger, it was thrust under a national spotlight.

The Norfolk-based banking company, which acquired Gateway at year-end, disclosed in a regulatory filing that former Gateway Chief Executive Ben Berry received $500,000 and former Executive Vice President David Twiddy received $425,000 for staying with Hampton Roads Bankshares.

What drew attention was the Dec. 31 date of the executives' employment agreements. It was the same day that Hampton Roads Bankshares received an $80.3 million capital infusion from the Treasury Department. The overlap prompted a financial blogger to write that Berry and Twiddy received "taxpayer financed signing bonuses."

The blogger's remarks, which appeared on the Web site footnoted.org and were picked up by ABC-TV news, became fodder for the debate over the Treasury's Troubled Asset Relief Program.

Jack Gibson, vice chairman and CEO of Hampton Roads Bankshares, said the payments that the company made to Berry and Twiddy didn't involve any of the TARP money that it received from the Treasury.

He acknowledged they might appear exceptional in light of the troubled banking environment and Gateway's losses last year from investments in the mortgage-finance giants Fannie Mae and Freddie Mac.

The payments were negotiated to retain Berry and Twiddy while protecting Hampton Roads Bankshares from possible competition if the two departed, Gibson said. Also, the compensation was much less expensive than the "change-of-control" severance that Hampton Roads Bankshares would have had to pay Berry and Twiddy if they had left.

Without Gateway's top management at Hampton Roads Bankshares, Gibson said, "it would have required much more work on our part and the loss of some key customer relationships."

Even so critics, including several members of Congress, already were arguing that banks receiving funds from the Treasury's financial-rescue effort hadn't disclosed how they were using the money. In the debate over whether Congress should make another $350 billion available for the TARP program, critics contended that some institutions failed to put the capital they received to work.

At the urging of the incoming Obama administration, the Senate approved the additional $350 billion on Jan. 15. However, economic advisers to the new president promised to impose tougher rules on the financial institutions that receive TARP capital, including restrictions on executive compensation.

"There's no question that there's a lot of interest in TARP, but there's a lot of confusion," Gibson said. "The first $350 billion was to help stabilize the whole financial network, and I think it's done exactly what it was designed to do."

Between October and year-end 2008, the Treasury program injected more than $177 billion into 214 banks, including at least a dozen in Hampton Roads. These ranged from giants like Bank of America and Wells Fargo & Co., which bought Wachovia Corp., to community banks like TowneBank, Monarch Bank parent Monarch Financial Holdings Inc. and Hampton Roads Bankshares.

Bankers in the region bristle at any suggestion that TARP's low-cost funds were handouts.

"We have to pay it back, and we have to pay a 5 percent annual dividend" on the preferred stock they issued to the Treasury in exchange for the funds, said Brad Schwartz, executive vice president and chief operating officer of Monarch Bank in Chesapeake. The banks also have to issue warrants that will allow the Treasury to buy their shares at current prices, which could provide the Treasury with a windfall if the prices of bank stocks rebound.

Throughout the country, many banks receiving capital from TARP have been leery about putting the money to work, fearing that loan losses later this year might erode their capital, said Christopher Eagan, a partner at the New York law firm Bryan Cave who specializes in banking. "Everyone is concerned about the economic slowdown and a lack of confidence in the future."

That's the case at some community banks in Hampton Roads because of their dependence on real estate and construction lending.

"The population of qualified borrowers is nowhere near what it is in a healthy environment," Gibson said.

Still, some banks said they've already lent the TARP money they received from the Treasury. Monarch, which received $14 million from the TARP program, said it put its funds to work in home mortgages.

Hampton Roads Bankshares is devising a plan for putting some of its TARP money into mortgages and loans for home builders, Gibson said.

In December, TowneBank lent all of the $76 million that it received to companies that came from other banks, said G. Robert Aston Jr., chairman and CEO of the Portsmouth-based bank.

I t will take time for the full effects of the new capital to be felt, Aston said. When leveraged, the infusion of Treasury funds provides TowneBank with the resources to make between $700 million and $800 million of new loans. But the bank still must generate the deposits to fund these new loans, and that will take time, Aston said.

When the Treasury began offering capital to banks in October, TowneBank already had $59 million of fresh capital that it raised from shareholders in August. The bank decided to apply for additional funds, Aston said, because its loan demand was strong and "none of us has a crystal ball as to where the economy is going."

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com