The U.S. Department of the Treasury has released a term sheet for participation by non-public companies in its Capital Purchase Program. Under the program, Treasury is providing up to $250 billion of capital to qualifying U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies engaged only in financial activities. Like the term sheet for publicly traded companies, the term sheet for non-public companies provides for the purchase by Treasury of preferred stock. However, instead of accompanying the preferred stock investment with a warrant to purchase common stock at the current market price, non-public companies must issue to Treasury a warrant to purchase additional shares of preferred stock at par value. The deadline for applying under the non-public company term sheet is December 8, 2008. S Corporations and mutual organizations are not covered by the new term sheet and this deadline will not apply to those types of organizations. The terms of the Capital Purchase Program for these institutions are still under consideration by Treasury.

The new term sheet is available for qualifying financial institutions, other than S Corporations and mutual institutions, that are not publicly traded. For purposes of the term sheet, “publicly traded” means a company whose securities are traded on a national securities exchange and that is required to file periodic reports with either the Securities and Exchange Commission (SEC) or its primary federal bank regulator. Companies that file periodic reports with the SEC but that are quoted on the OTC-Bulletin Board or Pink Sheets instead of a securities exchange are considered not publicly traded for purposes of the Capital Purchase Program and are eligible to participate in the Capital Purchase Program on the terms for non-public companies.

Preferred Stock Terms

The terms of the preferred stock investment in non-public companies are substantially the same as the terms for investment in public companies. The preferred shares will qualify as Tier 1 capital and will rank senior to common stock and pari passu – that is, at an equal level in the capital structure – with existing preferred shares, other than preferred shares which by their terms rank junior to any other existing preferred shares. The preferred shares will pay a cumulative dividend rate of 5 percent per annum for the first five years and will reset to a rate of 9 percent per annum after year five. The preferred shares will be non-voting, other than class voting rights on matters that could adversely affect the shares.

The preferred shares will be callable at par after three years. Prior to the end of three years, the preferred may be redeemed with the proceeds from a qualifying equity offering of any Tier 1 perpetual preferred or common stock, other than securities sold pursuant to arrangements that were entered into or announced before November 17, 2008, which is the date the preferred stock terms for non-public companies were released.

Non-public companies participating in the program will be subject to restrictions on dividends and stock repurchases that go beyond those that apply to publicly traded companies. For as long as any preferred shares are outstanding, no dividends may be paid on any common or other preferred shares and no common or other preferred shares may be repurchased unless all dividends have been paid on the senior preferred shares. Treasury’s consent will be required for any increase in common dividends for the first three years. After the third anniversary of the investment date and prior to the tenth anniversary, Treasury must approve any increase in common dividends that exceeds 3 percent per year and participating companies cannot use a stock dividend or split as a means to increase cash dividends. The dividend restrictions will cease to apply after the preferred shares have been redeemed in whole or Treasury has transferred the shares to third parties.

Treasury’s consent also will be required for any share repurchases until the tenth anniversary of the investment date, other than repurchases of the preferred securities and repurchases of common or junior preferred securities in connection with any benefit plan in the ordinary course of business consistent with past practice, unless before that time the preferred shares have been redeemed in whole or Treasury has transferred the shares to third parties.

After the tenth anniversary of the investment date, the participating institution cannot pay any common dividends or repurchase any equity securities or trust preferred securities until all equity securities held by Treasury have been redeemed or Treasury has transferred the shares to third parties. In comparison, publicly traded companies participating in the Capital Purchase Program are not subject to any dividend or repurchase restrictions after three years.

Treasury may transfer the preferred shares to a third party at any time, subject to compliance with applicable securities laws, and the preferred shares will not be subject to any restrictions on transfer contained in a stockholders’ agreement or similar arrangement among the institution and its stockholders. Treasury will not effect any transfer of the preferred shares that would require the institution to file periodic reports with the SEC. However, if the institution otherwise becomes a public reporting institution, it must file a shelf registration covering the preferred shares. It is not clear how the requirement to file a shelf registration statement will be applied to smaller reporting companies that are not listed on a securities exchange. Such companies are required to file periodic reports with the SEC, but are not eligible to file a shelf registration statement for the preferred shares because the market value of their public float does not exceed $75 million.

Warrant Terms

In conjunction with the purchase of preferred shares, publicly traded companies must issue to Treasury a warrant to purchase common stock with an aggregate market price equal to 15 percent of the preferred investment. The purpose of the warrant is to provide a return for the taxpayer. Non-public companies will provide Treasury with this extra return by issuing to Treasury a warrant to purchase additional shares of preferred stock with an aggregate liquidation preference equal to 5 percent of the preferred investment. The exercise price will be $0.01 per share, or such greater amount as the institution’s charter may require as the par value. According to the term sheet, Treasury intends to exercise the warrant immediately. The shares issued upon the exercise of the warrant will be identical to the preferred shares purchased at full price except that the shares will pay dividends at a rate of 9% from inception and may not be redeemed until all the preferred shares purchased at full price have been redeemed. Under limited circumstances, Treasury intends to waive the warrant requirement. If the size of Treasury’s investment is $50 million or less and the institution is a certified Community Development Financial Institution, Treasury will not require the issuance of the warrant.

Other Conditions

Non-public companies participating in the program must comply with the same standards for executive compensation and corporate governance that apply to public companies that participate. In addition, for so long as Treasury holds any equity securities of the participating institution, the institution and its subsidiaries cannot enter into any transactions with related persons unless such transactions are on terms no less favorable to the institution than could be obtained from an unaffiliated third party and have been approved by the audit committee or a comparable body of independent directors.

Conversion to Bank or Thrift Holding Company

Several non-bank companies in the financial services sector have recently announced their intention to become bank or thrift holding companies and access the Capital Purchase Program either through the acquisition of a bank or thrift or the conversion of an existing charter. In a Q&A related to the non-public company term sheet, Treasury clarified the ability to access the program in this manner.

Institutions that have filed a bank or thrift holding company application on or before December 8, 2008 may apply for the Capital Purchase Program on a conditional basis by the application deadline. In order to qualify for the program, the applicant must apply for approval to become a bank or thrift holding company through the ownership of a bank or thrift that was in existence on or before December 8, 2008. Final approval of the holding company application must be granted by January 15, 2009. Funding will not be provided prior to consummation of the transaction that requires bank or thrift holding company status.

A company that becomes a bank or thrift holding company to obtain funds through the Capital Purchase Program must maintain its status as a bank or thrift holding company for as long as Treasury holds preferred stock and/or warrants in the company.