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Capital Purchase Plan Term Sheet Issued for Privately Held Companies

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Randall L. Harbour
Foster Swift Economic Recovery Task Force Bulletin
November 19, 2008

Since Treasury took the TARP out of TARP, the impetus has been on the Capital Purchase Plan for the United States Treasury (UST) to invest in qualified financial institutions (QFIs).  The November 14 application filing deadline was for QFIs that are publicly reporting companies.  On November 18, UST issued the term sheet for privately held QFIs.  The filing deadline for privately held QFIs is December 8, 2008.

For purposes of this term sheet, a QFI is the top-tier holding company, bank or savings and loan, that is not publicly traded - i.e., one whose securities are not traded on a national stock exchange and is not required to file periodic reports (Form 10-K or 10-Q) under the securities laws.  This term sheet does not apply to QFIs that have elected status under Subchapter S of the Internal Revenue Code, mutual companies, credit unions, or insurance companies.

The terms are similar, but not identical, to the prior terms for publicly held QFIs.  UST may purchase Preferred shares in an amount equal to not less than 1% of risk-weighted assets and not more than the lesser of (i) $25 Billion or (ii) 3% of its risk-weighted assets.  The liquidation preference of the Preferred is $1,000 per share.  The Preferred will have a perpetual life, be non-voting (except for certain class protections), and will be transferable.

UST will also receive warrants for a number of net shares of preferred stock of the QFI - Warrant Preferred shares.  The Warrant Preferred will be equal to 5% of the Preferred investment by UST.  UST intends to immediately exercise the warrants.

The Preferred shares will pay a cumulative dividend at the rate of 5% per annum for the first five years, and at a rate of 9% thereafter.  (If the QFI is a bank that is not a subsidiary of a BHC, the dividends will be non-cumulative.)  Preferred may not be redeemed for a period of three years after the investment except for a "qualified equity offering."  There are substantial limitations on the QFI granting dividends to other preferred or common shareholders without UST's consent if accrued dividends on the Preferred are not paid in full.  UST's consent is necessary to redeem any equity securities or trust preferred securities for the first ten years.  After the 10th year, if the Preferred and Warrant Preferred shares have not been redeemed, the QFI is prohibited from paying any common or other preferred dividends.

While UST holds any equity, there are restrictions on executive compensation, benefits, and deferred compensation arrangements.  There are also certain corporate governance requirements. 

The Warrant Preferred shares will have a ten year term.  They will have the same rights and terms as the Preferred shares except that the Warrant Preferred will pay dividends at the rate of 9% from the date of the investment.  Also, the Warrant Preferred may not be redeemed until all of the Preferred shares have been redeemed.  The Warrant Preferred raise the cost to the QFI for the CPP investment during the first five years.

If we may be of assistance in answering questions and getting you through the process, please contact me or anyone on our Economic Recovery Task Force.