On November 17, 2008, the Treasury announced the terms for participation in the Capital Purchase Program (“CPP”) by privately held banks, savings and loans and their holding companies. The program is very similar in many respects to the program in place for publicly traded institutions, except as noted below. Under the plan:

Qualified Financial Institution

The Private Bank CPP defines Qualified Financial Institution eligible to participate in the program as (i) a top-tier bank holding company (“BHC”), or toptier savings and loan holding company (“SLHC”) that engages solely or predominately in activities permissible for financial holding companies under relevant law, that in either case is not publicly traded, (ii) a U.S. bank or U.S. savings association organized in stock form that are neither publicly traded nor controlled by a BHC or SLHC, or (iii) a U.S. bank or U.S. savings association that is not publicly traded and is controlled by a SLHC that is not publicly traded and does not engage solely or predominately in activities that are permitted for financial holding companies under relevant law.

Not Publicly Traded

The Private Bank CPP defines a private bank as one that is not publicly traded, which is defined as a company (1) whose securities are traded on a national securities exchange and (2) required to file, under the federal securities laws, periodic reports such as the annual (Form 10-K) and quarterly (Form 10-Q) reports with either the Securities and Exchange Commission or its primary federal bank regulator.

Engages Solely or Predominately in Activities Permissible for Financial Holding Companies

The Private Bank CPP requires holding companies to be engaged solely or predominately in activities permissible for financial holding companies. It is important to note that the holding company does not have to be a registered financial holding company, just that it be engaged in those activities permissible for financial holding companies. The “financial holding company” was created as part of the Gramm-Leach- Bliley Act and broadened substantially the permissible activities for a bank holding company. In particular, the GLBA permitted affiliations between banks, insurance companies and securities firms, and allowed bank holding companies to engage in limited merchant banking activities. A notable exception is that to date, the Federal Reserve has not permitted most real estate activities to be conducted through a financial holding company. This limitation in the Private Bank CPP may restrict participation by some savings and loan holding companies with significant real estate activities.

Excluded Companies

The Private Bank CPP specifically excludes Subchapter S corporations and mutually owned thrifts or mutual holding companies. The Treasury stated that they are continuing to develop a program for these institutions. Unfortunately, no timetable has been given as to when the Treasury will release details on participation for Subchapter S and mutual institutions. Placeholder Provision Institutions that have filed a bank or thrift holding company application on or before December 8, 2008 may apply to the Private Bank CPP program through their federal banking regulator on a conditional basis by the applicable deadline. In order to qualify, the applicant company must apply for approval to become a bank or thrift holding company through ownership of a U.S. bank or savings association that was in existence on or before December 8, 2008. Final approval of the holding company application must be granted by the applicable federal banking agency by January 15, 2009. Funding will not be provided prior to consummation of the transaction for which bank or thrift holding company status was necessary. Any bank and thrift holding company, which received funding under CPP, 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. A bank or thrift holding company seeking to terminate its status as such must fully redeem all preferred stock and warrants held by Treasury prior to terminating its status.

This “placeholder provision” is a path for non-banks to gain access to CPP funds. It has been reported that four insurers have struck deals to acquire thrifts and apply for funds under CPP. As more nonbanks begin to analyze the benefits and costs of the CPP, there could be a rush of deals announced before the December 8th deadline.

Additional Dividend Restriction

The Private Bank CPP contains restrictions on dividends similar to the public bank CPP with two added restrictions: (1) the Treasury’s consent must be obtained prior to any increase in common stock dividends for the first three years after investment and after the first three years through the tenth year, such consent is required for increases in dividends greater than three percent per year; and (2) from and after the tenth anniversary of the investment, the issuer may not pay any dividends on common shares or repurchase any equity or trust preferred shares until all the senior preferred shares held by the Treasury are either redeemed or transferred. This in effect places a ten year limit on Treasury’s investment by forcing the issuer to either repurchase the shares or facilitate Treasury’s transfer of the shares.

Related Party Transactions

For as long as the Treasury holds any equity securities of the participating institution, such institution and its subsidiaries may not enter into transactions with related persons (within the meaning of Item 404 under the SEC’s Regulation S-K) unless (i) such transactions are on terms no less favorable to the institution and its subsidiaries than could be obtained from an unaffiliated third party, and (ii) have been approved by the audit committee or comparable body of independent directors of the institution.

No Registration Rights

The senior preferred shares are freely transferable, however, the Treasury will not require an issuer to register with the SEC under the Securities Exchange Act of 1934 (the “1934 Act”) in order to facilitate the transfer. If the issuer later becomes subject to the reporting requirements of the 1934 Act, then it must file a shelf registration for the sale of the shares.


The issuer will also grant the Treasury a warrant to purchase an additional five percent of the senior preferred shares at an exercise price of $.01 per share. The warrant will have a term of ten years and will be immediately exercisable. The Warrant Preferred Shares will have the same rights as the senior preferred shares except that it will pay nine percent dividends and the Warrant Preferred Shares may not be redeemed until all the senior preferred has been redeemed. The warrant will not be subject to any restrictions on transfer or shareholder agreements that may apply to other shareholders, except that the Treasury may not require the issuer to become subject to the reporting requirements of the 1934 Act. If the issuer becomes subject to the 1934 Act, it will file a shelf registration covering the warrant and the Warrant Preferred Shares.

Warrant Exception

The Treasury will not require the issuance of a warrant if the size of the investment is $50 million or less and the issuer is a certified Community Development Financial Institution (“CDFI”). A CDFI is a specialized financial institution that works in market niches that are underserved by traditional financial institutions. Issuers that are not already a CDFI may file an application for certification as a CDFI together with its Private Bank CPP application by December 8, 2008. If an institution has applied for CDFI certification, and it is eligible for funding under the Private Bank CPP, it will receive conditional approval, which will be contingent on its receiving the CDFI certification. The CDFI certification must be approved by January 15, 2009.

Terms That Are Similar to the Public Bank CPP

Many of the remaining terms of the Private Bank CPP are the same as the program for publicly held institutions. The participants in the Private Bank CPP will issue senior preferred stock in an amount not less than one percent nor more than three percent of the issuer’s risk adjusted assets, up to $25 billion; the senior preferred shares will be non-voting, unless the issuer has failed to pay dividends for six periods, in which case the Treasury can elect two directors; the senior preferred will have perpetual life and will qualify as Tier 1 capital; the shares will pay dividends at the rate of five percent for the first five years and nine percent thereafter (cumulative for holding companies and non-cumulative for issuing banks or thrifts); no redemption is permitted during the first three years, unless part of a qualified equity offering of not less than twenty-five percent of the issue price of the preferred shares; the participating companies are subject to dividend, share repurchase and executive compensation limitations; there are no restrictions on transferability, except as noted above; and the issuer must provide piggyback registration rights.


Applications under the Private Bank CPP must be filed with the primary Federal regulator by December 8, 2008.