TARP, ARRA and limits on pay…

Tempting as it is to focus on the giant banks, like Citi (C) and Bank of America (BAC), I couldn’t help but notice this 8K filed by The South Financial Group (TSFG) late Friday. Over the past year, the South Carolina bank’s stock has declined by 95% and the stock is currently trading at under a buck.

Earlier this month, the bank announced that an interim CEO it had named in November, H. Lynn Harton, would be staying on permanently.

Now here’s where it starts to get interesting: in between the time the bank announced Harton’s appointment and the time Harton’s compensation was set by the board, President Obama signed the American Recovery and Reinvestment Act (ARRA). The board set Harton’s salary at $650K and offered a performance bonus of 70%. Keep in mind that back in December, the bank accepted $347 million in TARP money.

Now under TARP, there were limits on executive compensation that would seem to make it impossible to pay Harton $650K a year. Then again, he was just an interim president at the time, so it’s unclear if the rules would have applied. On Feb. 4, the Treasury Department issued guidelines on executive compensation, but they were a bit more loosey-goosey. And under ARRA, which was signed on Feb. 17, there were no hard and fast limits on base salaries — just bonuses. Still, under the ARRA rules, it would appear that the 70% bonus doesn’t fit the rules. Confused? This primer from law firm Jones Day may help.

Of course, without the actual contract — just the 8K that talks about the agreement — its hard to really know. Still, it just shows that despite all of the endless talk about compensation limits, things like this manage to slip by.

One other interesting thing about South Financial: earlier today, they gave a presentation to investors. Of the $347 million, they received from Treasury, $260 million was injected into subsidiary Carolina First Bank. The remaining $87 million was kept at the parent company for liquidity. But according to the slide on pg. 26, Carolina First’s Tier One capital exceeded the definition for a well-capitalized bank before the injection. The $260 million brought Tier One up to 10.88% from 9.82 (the well capitalized minimum is 6%).Which begs the question: what did that injection from Treasury really do?

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