As 2009 came to a close, Fifth Third Bancorp was preparing to report its sixth loss in seven quarters.

The Cincinnati-based regional bank had received $3.4 billion of TARP funds with no immediate plan to repay. And its Midwestern market was still struggling with a shrunken auto sector and high mortgage foreclosure rates.

Nonetheless, the board of Fifth Third, the nation's 17th-biggest bank, decided to increase the compensation of Chief Executive Kevin Kabat by 56 percent, to $5.2 million -- even though the bank was barred from paying him a bonus because of the bailout rules.

Fifth Third wasn't alone.

PNC Financial Services Group

, Regions Financial and KeyCorp -- all of which owed billions of dollars to taxpayers at the end of 2009 -- also increased their chiefs' pay. They too were prohibited by rules stemming from the U.S. Treasury's Troubled Asset Relief Program (TARP) from paying bonuses to their CEOs.

In the aftermath of the financial crisis, Wall Street banks and their pay practices have garnered national attention. Once Goldman Sachs Group Inc , Morgan Stanley and other banking giants repaid their bailouts last year, they quickly returned to setting aside billions of dollars for bonuses -- stoking the public's anger about the bailout.

Yet at the same time, Fifth Third, PNC, Regions, KeyCorp and other large heartland banks have been quietly approving pay increases for their top executives as well. Even banks that had yet to repay TARP money rewarded their bosses handsomely.

While far from Wall Street -- and away from the spotlight -- the pay practices of the so-called second tier banks are still a concern.

U.S. Rep. Peter Welch, a Democrat from Vermont who has proposed a tax on bonuses, called it a rip-off for banks still receiving taxpayer support to reward their CEOs with pay increases.

Whether they call it a bonus, a stock option, or they inflate their salary, that is wrong and a rip-off, Welch said.

A REBOUND

This year PNC repaid TARP, but Fifth Third, KeyCorp and Regions remain beholden to the TARP program.

Shares of all four banks have rebounded substantially in the past year as the banking industry has recovered.

Their results in 2009 were better than in 2008, said Kenneth Raskin, the head of law firm White & Case's executive compensation practice. The fact that their compensation increased, that is a result of the company doing better.

The CEOs of Fifth Third, Pittsburgh-based PNC, Birmingham, Alabama-based Regions and Cleveland-based KeyCorp had all taken pay cuts since 2007, when the financial crisis began to shake the banking industry.

Still Kenneth Feinberg, the Obama administration's pay czar, said that any type of guaranteed compensation would be a concern.

Feinberg had the authority to enforce the TARP pay restrictions at the biggest bailout recipients before they repaid their TARP bailouts.

He used his power to slash cash compensation by 90 percent and total compensation by 50 percent for the top 25 employees at each of the companies under his jurisdiction. Feinberg in most cases has limited base pay to $500,000.

PNC, Fifth Third, Regions, KeyCorp and others like them did not have a pay czar standing over them, and thus found it more challenging to adjust to the TARP rules on their own.

Laura Thatcher, who leads law firm Alston & Bird's executive compensation practice in Atlanta, said some banks had to readjust their thinking about how TARP would affect compensation.

HOW THEY WERE PAID

In better times in 2007, PNC chief James Rohr received a pay package of $18.8 million, including a bonus of $2.63 million. His pay included a base salary of $950,000, plus $10.8 million in stock and options awards.

A year later, in 2008, as PNC entered TARP and the banking industry was turned upside down, Rohr's compensation sank to $12.2 million. His bonus, per TARP rules, was gone. His salary increased slightly to $1 million, and his stock and options awards totaled about $7.5 million.

In 2009, as PNC's shares came roaring back -- they have more than doubled in the past year -- so did Rohr's compensation. PNC in February paid back the $7.6 billion it received from taxpayers.

Rohr made $18 million in 2009, including $2.75 million in salary. His stock and options were worth $11.8 million. Again he received no bonus.

PNC spokesman Fred Solomon said Rohr's 2009 compensation included two years worth of incentive pay, which was decided on before the TARP rules were announced. He also noted that some of the 2009 compensation could be forfeited under TARP rules. Asked how that would work, Solomon said he did not know.

Fifth Third CEO Kabat's base salary more than doubled from $900,000 to $2.1 million in 2009. Fifth Third spokesman Debra DeCourcy said a portion of the base salary included phantom stock, shares that have been granted to him, but that he cannot sell until 2011.

Fifth Third still owes taxpayers $3.4 billion and is eyeing repayment in 2010. The company trimmed its losses in the fourth quarter but remains exposed to some of the areas of the United States hardest hit by the financial crisis.

The bank declined to make available a member of its compensation committee to discuss how it decided on Kabat's pay.

DeCourcy said she was not permitted to speak about the compensation committee's decision but added that Fifth Third is a pay-for-performance company.

ON THE WAY OUT

Regions CEO Dowd Ritter stepped down last week after a long-planned power transfer at the bank. Before he left, Regions boosted his 2009 pay to $9.7 million, from $6.8 million in 2008.

Ritter's base pay was $995,000, consistent with what he received in 2007 and 2008. But his stock grants were worth $4.7 million in 2009, nearly 10 times what he received in 2008.

The pay of Ritter's successor, Grayson Hall, has not yet been disclosed.

After Regions reported a fourth-quarter loss, Ritter said in a statement: Regions, along with the financial services industry, still faces some near-term credit and economic challenges.

Regions still has $3.5 billion in TARP bailouts.

Tim Deighton, a spokesman for Regions, said a member of the compensation committee was not available for an interview. The other three banks were also unable to make a member of the compensation committee available for interview.

Our pay decisions and programs for 2009 comply fully with TARP and we believe they meet the legislative intent of the requirements and restrictions, Deighton said.

KeyCorp, which has $2.5 billion in TARP, raised CEO Henry Meyer's pay raise to $8.1 million in 2009 from $6.7 million in 2008. Meyer's base salary rose to $1.6 million in 2009 from $1 million, but the increase was in shares of KeyCorp that cannot be sold until the company repays TARP.

KeyCorp spokesman William Murschel directed a questioner to the bank's proxy filing, which said compensation decisions were based on performance assessments and a thorough analysis of similar U.S. banks.

SunTrust Banks , an Atlanta-based regional bank, was the biggest bailed-out bank that did not increase its CEO's pay in 2009. CEO James Wells compensation fell to $7.7 million last year from $8.1 million in 2008.

OUT OF SIGHT, OUT OF MIND

Many of the major-bank counterparts of the regionals -- in particular, Goldman Sachs, Morgan Stanley, Citigroup and Bank of America Corp -- could not avoid the spotlight over pay.

The bigger guys have taken more of a beating, attracted the headlines, said Lawrence White, a professor at the New York University Stern School of Business.

When it comes to the regionals, White said, The numbers -- whether it is size of the bank, the size of the loss, the size of the CEO's bonus -- those numbers are smaller and less eye-catching.

That PNC, Regions, Fifth Third and KeyCorp could increase their CEO's pay with bailout cash in hand and at a time of intense public scrutiny speaks to the anonymity of the biggest U.S. biggest banks off Wall Street, White said.

Outside of the western Pennsylvania, eastern Ohio, northwest West Virginia, who else has heard of PNC? White said. They just don't have the same national recognition that a Goldman or a JPMorgan or Citi has.

(Reporting by Steve Eder in New York; Additional reporting by Joe Rauch in Charlotte; Editing by Jeffrey Cane and Steve Orlofsky)

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