Treasury Releases Term Sheet For TARP Participation By Non-Public Banks

On November 17, 2008, the Treasury released the term sheet and related FAQs for non-publicly traded financial institutions participating in the TARP Capital Purchase Program (“CPP”).   This term sheet applies to (1) non-publicly traded Bank Holding Companies and Savings and Loan Holding Companies, (2) U.S. banks and U.S. savings associations that are neither publicly traded nor controlled by a Bank Holding Company or Savings and Loan Holding Company, and (3) U.S. banks and U.S. savings associations that are not publicly traded and are controlled by a Savings and Loan Holding Company that is not publicly traded and does not engage solely or predominately in activities that are permitted for financial holding companies.  A non-publicly traded institution for CPP purposes is one whose securities are not traded on a national securities exchange.  The deadline for non-publicly traded financial institutions to apply to participate in the CPP is December 8, 2008.  The terms announced on November 17, 2008 do not apply to S Corporations and mutually held organizations; the terms for these entities have not been released. 

While many of CPP terms for non-publicly traded financial institutions are comparable to those for publicly traded institutions, there are significant differences as outlined below. 

• Treasury will receive warrants to purchase preferred stock.  Instead of warrants to purchase common stock, Treasury will receive warrants to purchase additional preferred stock (“Warrant Preferred”) having a liquidation preference equal to 5% of the amount of Treasury’s initial investment in the Institution’s preferred stock (“Preferred”).  The initial exercise price of the Warrant Preferred shares will be the greater of $0.01 per share or the Warrant Preferred share’s par value.  Treasury intends to exercise the warrants immediately.  The Warrant Preferred shares will pay an annual dividend of 9%, and may not be redeemed until all other preferred shares held by Treasury are redeemed.

• Treasury consent required to increase dividends.  Prior to the third anniversary of investment, Treasury must consent to any increase in dividends payable to the Institution’s common shareholders.  However, after the third anniversary and before the tenth anniversary of the investment, Treasury’s consent is required only for an increase in the dividends payable to the Institution’s common shareholders greater than 3% per year; provided that no increase in common dividends may be made as a result of any dividend paid in common shares, and stock split or similar transactions.  These restrictions will no longer apply if the Preferred and Warrant Preferred are redeemed in whole or the Treasury has transferred all of the Preferred and Warrant Preferred to third parties.  The public company term sheet does not impose any requirements on common dividends beyond the third anniversary of the investment date. 

• Treasury’s consent is required to repurchase any equity securities or trust preferred securities until the tenth anniversary of the investment.  The Treasury’s consent is required in these situations only if the Preferred and Warrant Preferred have not been redeemed or if the Treasury has not transferred the Preferred and Warrant Preferred to third parties.  The public company term sheet does not impose similar requirements beyond the third anniversary of the Treasury’s investment. 

• Dividend and repurchase restrictions after the tenth anniversary of the investment.  After the tenth anniversary of the Treasury’s investment, the Institution is prohibited from paying common dividends or repurchasing any equity securities or trust preferred securities until Preferred and Warrant Preferred held by Treasury are redeemed in whole or Treasury has transferred all such equity securities to third parties.  These restrictions appear to be designed to encourage the Institution to redeem the Preferred and Warrant Preferred before the tenth anniversary of the Treasury’s initial investment.   

• Treasury or its transferees will not effect any transfer of the Preferred or Warrant Preferred that would require the Institution to become subject to the periodic reporting requirements of Section 13 or 15(f) of the Exchange Act.  However, if the Institution otherwise becomes subject to the reporting requirements, the Institution will be required to file a shelf registration statement covering the Preferred or Warrant Preferred as soon as practicable.  Further, the Treasury and its transferees will have piggyback registration rights for the Preferred and Warrant Preferred. 

• Restrictions on related party transactions.  As long as the Treasury holds either Preferred or Warrant Preferred of the Institution, the Institution and its subsidiaries may not enter into transactions with “related persons” unless (i) the transactions are on terms no less favorable to the Institution and (ii) its subsidiaries than can could have been obtained from a third party and have been approved by the Institution’s audit committee or comparable body of independent directors.  

Treasury did not alter many terms for non-publicly traded institutions from those previously announced for publicly traded institutions. 

• The capital provided by Treasury will count as Tier 1 capital. 
• The Preferred will pay a dividend at a rate of 5% for the first five years and at a rate of 9% thereafter. 
• The dividends on the Preferred and Warrant Preferred are non-cumulative when issued by banks that are not subsidiaries of holding companies.  
• Institution will be subject to same restrictions on executive compensation as a previously announced for public companies.

Closing Procedures for CPP

Our experience allows us to make some general remarks regarding the closing of a CPP transaction which we anticipate will also apply to closings on non-public institution transactions.  The approved Institution will receive informal notice that it has been preliminarily approved to participate in the CPP.  Approximately one week after receiving informal notice, the Institution will receive formal notice of its acceptance in the program along with further instruction regarding the closing process.  The closing schedule is dictated by the law firm retained by Treasury to handle the CPP investments.  It is a rapid closing schedule with the notification of closing date, drafts prepared of all the closing documents, pre-closing, and finally closing happening within approximately seven to ten days from the Institution’s receipt of formal notice of its acceptance.  

Our attorneys are happy to assist you at any point in this process by completing the CPP application, preparing documentation for closing, or advising your Institution’s Board of Directors and management with how to proceed.