Bankin’ Bits

On November 17, 2008, the U.S. Treasury (Treasury) released a term sheet for qualified privately-held financial institutions (QFIs) to participate in the TARP Capital Purchase Program (CPP).

• Deadline. The application deadline is December 8, 2008. With this deadline less than three weeks away, all QFIs desiring to participate in the CPP should begin the application process immediately, unless already filed. A copy of the application, together with other information about the CPP, can be accessed by clicking here. (Note: The Treasury has not updated the application form, which still reflects a November 14th filing deadline.)
• S-corporations not Covered. The term sheet does not apply to S-corporations or mutual depository institutions. A separate term sheet for these entities has not been issued.

Like its public company counterpart, the private company term sheet summarizes the terms and conditions under which a QFI may sell shares of preferred stock to the Treasury. Although the provisions of this term sheet are similar to the public term sheet released in October, there are some notable differences. These differences include:

• Warrant Terms. The public term sheet requires CPP participants to grant the Treasury warrants to purchase the participant’s common shares. The warrants’ exercise price is based on the current market value of the participant’s common stock. Under the private term sheet, QFIs must grant warrants to purchase preferred shares. These warrants must have an aggregate liquidation preference equal to 5% of the preferred stock purchased by the Treasury. The warrants have an exercise price of $.01 per share and, although the warrants are exercisable for ten years, the Treasury intends to exercise them immediately.
• Other Dividend and Repurchase Restrictions. Under the private term sheet, after the tenth anniversary of the Treasury’s purchase of a QFI’s preferred stock, the QFI will be restricted from paying common dividends or repurchasing any equity securities or trust preferred securities until after the QFI redeems all of its equity securities held by the Treasury, or until the Treasury transfers all such equity securities to third parties.
• Dividend Increases. The public term sheet forbids participating institutions from increasing common dividends for the first three years after the date of the Treasury’s purchase of the institution’s preferred shares. The private term sheet includes additional restrictions on dividend increases. Not only must a QFI obtain the Treasury’s consent before increasing its common dividend during the three years following the Treasury’s purchase of the institution’s preferred shares, but for the time between the third and tenth anniversary of the Treasury’s purchase, the QFI must obtain the Treasury’s consent before increasing its common dividend by more than 3% per annum. This restriction is void once the preferred shares are redeemed or the Treasury transfers them to third parties.

To view our summary of the private term sheet, click here. To view the full text of the private term sheet, click here. Treasury has also provided a FAQ sheet regarding these new terms and is available by clicking here.