Main Menu
Treasury Will Allow Private Banks To Participate In The Capital Purchase Program --- Private Bank Applications Due December 8

Treasury Secretary Henry Paulson recently announced terms for private bank participation in Treasury’s capital purchase program (the “CPP”). Private bank applications under the CPP are due on December 8, 2008. Among the key features of the CPP for private banks (“Private Bank Program”) are the following terms.


  • Amount of Equity; Eligible Institutions. Eligible institutions will be able to sell Preferred Stock to Treasury in a minimum amount equal to 1% of the institution’s risk-weighted assets. The maximum amount of Preferred Stock eligible for purchase by Treasury is the lesser of: (a) an amount equal to 3% of the institution’s risk-weighted assets; or (b) $25 billion. In general, the Private Bank Program is available to U.S. private banks and bank holding companies, as well as private savings and loan holding companies and savings associations. However, S corporations and mutual depository institutions are not eligible to participate in the Private Banking Program at this time. Treasury noted that participation by S corporations and mutual depository institutions is still under consideration.


  • Features of Preferred Stock. Holding company purchases will be in the form of cumulative perpetual Preferred Stock. However, if an institution is not controlled by a holding company, the purchase will be in the form of non-cumulative perpetual Preferred Stock. Shares purchased by Treasury will have a dividend rate of 5% per annum until the fifth anniversary of the investment and a dividend rate of 9% per annum thereafter. Shares may be redeemed by the institution during the first three years following the investment only from the proceeds of a qualifying stock issuance. After the third anniversary date, the shares may be redeemed, in whole or in part, at any time. The Preferred Stock will be classified as Tier 1 capital. It will be non-voting, except for class voting rights with respect to authorization or issuance of shares ranking senior to the Preferred Stock or with regard to any merger, exchange or similar transaction which would adversely affect the rights of the Preferred Stock.


  • Warrants. Along with the Preferred Stock, Treasury will obtain warrants for additional shares of the institution’s Preferred Stock (“Warrant Preferred”) with an aggregate liquidation preference equal to 5% of the Preferred Stock amount on the date of investment. Treasury noted that it will not require warrants for private financial institutions where the investment amount is $50 million or less and the institution is a certified community development financial institution. In general, community development financial institutions provide financial products and services in economically distressed target markets. The warrants will have a term of 10 years and will be immediately exercisable at a price of $0.01 per share, or such greater amount as the charter may require as the par value of the Warrant Preferred. The Warrant Preferred will have the same terms as the Preferred Stock except that the Warrant Preferred will pay a dividend of 9% per annum and may not be redeemed until all the Preferred Stock has been redeemed.


  • Transferability of Preferred Stock and Warrants. Neither the Preferred Stock nor the warrants will be subject to any restrictions on transfer. However, Treasury will not transfer the Preferred Stock or the warrants in such a manner that the institution would become a public company. If the institution otherwise becomes a public company, it must file a shelf registration statement covering the Preferred Stock, the warrants and the Warrant Preferred, and it must also afford piggyback registration rights to Treasury.


  • Application Procedure. The CPP guidelines emphasize that institutions must consult with their appropriate regulatory authority prior to submitting their applications. After review, the financial regulatory agency will submit the application to Treasury, along with a recommendation. Treasury will then review the application and determine whether the capital investment will be approved.


  • Related Investment Agreement. Applicants must review the form investment agreement being prepared by Treasury and agree to all of its terms and conditions, including certain representations and warranties.


  • Restrictions on Dividends and Repurchases. Subject to certain exceptions, for as long as the Preferred Stock is outstanding, no dividends may be declared or paid on junior preferred shares, preferred shares ranking pari passu with the Preferred Stock or common shares (other than in the case of pari passu preferred shares, dividends on a pro rata basis with the Preferred Stock), nor may the institution repurchase or redeem any junior preferred shares, preferred shares ranking pari passu with the Preferred Stock or common shares, unless all accrued dividends for all past periods are fully paid (in the case of cumulative Preferred Stock) or the full dividend for the latest completed dividend period has been paid (in the case of non-cumulative Preferred Stock). Treasury’s consent will be required for any increase in common stock dividends until the third anniversary of the date of the investment. After the third anniversary and prior to the tenth anniversary, Treasury’s consent will be required for any increase in aggregate common dividends greater than 3% per annum. From and after the tenth anniversary of the investment, the institution will be prohibited from paying common dividends or repurchasing any equity securities or trust preferred securities until all equity securities held by Treasury are redeemed in whole or Treasury has transferred all of such securities to third parties.


  • Executive Compensation Standards. So long as Treasury owns equity in the institution, compensation for certain senior officers must meet standards established by Treasury. Among other things, the Treasury standards: (a) require institutions to avoid compensation that would provide incentives for senior executive officers to take “unnecessary and excessive risks” that threaten the value of the institution; (b) require that institutions provide for the recovery of any bonus or incentive compensation paid to a senior executive officer if the financial criteria on which it was based later proves to be materially inaccurate; (c) establish a deduction limit of $500,000 for remuneration paid by the institution to a senior executive officer for federal tax purposes; and (d) prohibit “golden parachute payments” to senior executive officers. For this purpose, “golden parachute payment” is defined, in general, to mean any payment to the senior executive officer made on account of an “applicable severance from employment” to the extent that the aggregate present value of such payments equals or exceeds an amount equal to three times the senior executive officer’s average compensation over the five years prior to termination of employment. An “applicable severance from employment” is defined as a severance from employment by reason of involuntary termination or in connection with any bankruptcy filing, insolvency or receivership of the financial institution.


The above description is only a general summary of certain key provisions of the Private Bank Program. As you can see, there are numerous conditions to participation which should be carefully considered by private financial institutions. Private Bank Program applications must be received by the appropriate regulatory agency on or before December 8, 2008. If a financial institution is interested in participating in the Private Bank Program, the institution should immediately review and evaluate its terms. Please feel free to contact Ivan M. Diamond (502-587-3534;, June N. King (502-587-3637; or your Greenebaum Doll & McDonald PLLC attorney for additional information about the Private Bank Program and the application process.

  • In Memoriam

    1940 - 2013 In Memoriam

    Ivan died at home on June 17, with Penny, his wife of 50 years, at his side, listening to his favorite jazz music. During a five-year battle with cancer, Ivan and Penny completed a lengthy bucket list of trips ...

  • Partner

    June is a member of the Business Services Department. Her practice focuses on U.S. and state securities laws compliance, Sarbanes-Oxley Act and corporate governance issues, and financial institution regulatory matters. She ...



Recent Posts




Back to Page