Troubled Asset Relief Program (TARP): Capital Purchase Program

Last Friday, October 31, 2008, the Treasury Department released additional documentation for publicly traded banks applying under the Capital Purchase Program. These documents are available here. Treasury also stated that the November 14, 2008 application deadline and public term sheet for participating in the Program applies solely to publicly traded banks. Separate term sheets and application deadlines for the remaining types of institutions, including private companies, S-Corporations and SEC reporting companies not listed on a national exchange, will be posted at a later date.

We will continue to provide updates and additional guidance as new information becomes available. In the meantime, if you have any questions regarding the Capital Purchase Program or other aspects of the Treasury’s Troubled Asset Relief Program, please contact an attorney in our Financial Institutions Group:

Robert C. Schwartz

W. Thomas King

Reese C. Porter

Joel B. Carter

Jeffrey A. Bekiares

Troubled Asset Relief Program (TARP): Capital Purchase Program (10/23/08)

On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (the “Act”). Under the Act, the Secretary of the Treasury is authorized to establish the Troubled Asset Relief Program (the “TARP”), which provides the Treasury Department with the power to purchase troubled assets from financial institutions. Troubled assets are defined to include residential or commercial mortgages and mortgage-related securities, as well as any other financial instrument the Secretary determines are necessary to promote financial market stability.

Capital Purchase Program

On October 14, 2008, the Treasury, as part of TARP, announced a voluntary Capital Purchase Program under which the Treasury will commit up to $250 billion to purchase equity securities in financial institutions, with $125 billion of that amount directed at nine large financial institutions. The remaining $125 billion is available to small and midsized financial institutions, with the approval of their primary federal regulator, that elect to participate in the program by 5:00 pm (EST) on November 14, 2008. Under the Program, eligible institutions will be able to sell equity interests to Treasury in amounts equal to 1% to 3% of the institution’s risk-weighted assets. These equity interests will constitute Tier 1 capital. Treasury will also receive warrants to purchase common stock with an aggregate market price equal to 15% of the equity investment. For publicly traded companies, Treasury’s equity investment will be in the form of senior preferred stock. Specific terms for non-public institutions and S-Corporations have not been released and it is not clear precisely what kind of security these institutions would sell to Treasury, but we expect it would be broadly comparable to the senior preferred issued by publicly traded organizations.

On October 20, 2008, following remarks by Treasury Secretary Paulson, Treasury and the federal banking agencies issued Application Guidelines and an interagency Application for the Capital Purchase Program, together with FAQs related to the Program (see http://treas.gov/initiatives/eesa/). The Application is designed as a single application form for use by all qualified participants. The Application and the related materials are discussed in more detail below.

Eligible Participants in TARP Capital Purchase Program

The Capital Purchase Program is available only to “qualifying financial institutions,” which generally include U.S. controlled banks and thrifts, and bank and thrift holding companies. Indications are that all “healthy” institutions are eligible to participate in the Program. Treasury has not identified more specific criteria, but presumably institutions that are well- or adequately- capitalized and that have a composite CAMELS rating of 1, 2 or 3 will qualify. In addition, Treasury has publicly stated the $250 billion being dispensed under the Program is based on providing enough capital to cover the maximum amount of capital that can be distributed to each eligible institution. All measurements will be based on the latest quarterly supervisory report filed by the applicant, updated to reflect events materially affecting the financial condition of the applicant occurring since the filing of such report.

Terms of Capital Purchase Program

On October 14, 2008, Treasury released a public term sheet setting forth the key terms of the equity investment plan for publicly-traded institutions, including executive compensation restrictions for participating institutions. A copy of this term sheet is attached as Exhibit A. As mentioned above, Treasury has not released terms for privately held companies, including those organized as “Subchapter S” corporations for federal tax purposes. However, we expect the terms to be broadly comparable to the terms described in the public term sheet.

TARP Capital Purchase Program Public Company Term Sheet

Application for TARP Capital Purchase Program

The Application is a standard form that all qualified institutions will use to submit to their primary federal regulator — the Federal Reserve, the FDIC, the Office of the Comptroller of the Currency or the Office of Thrift Supervision. All capital purchases will occur at the highest-tier holding company in cases in which the banking organization has a bank or thrift holding company. If the applicant is a bank or thrift holding company, the application must be submitted to both the applicant’s holding company supervisor and the supervisor of the largest insured depository institution controlled by the applicant. The Application and the Application Guidelines are attached as Exhibit B. Specific filing protocols, including where the application should be directed, will be made available on each federal banking agency’s website. Additionally, applicants will be required to agree to certain terms and conditions and make certain representations and warranties described in various agreements prepared by Treasury. Treasury will be posting a detailed investment agreement and other agreements for applicants in the upcoming days.

How SGR Can Help

We are prepared to help you evaluate Treasury’s Capital Purchase Program and participate in the Program if you determine it is prudent to do so. Specifically, we are available to:

evaluate the terms of the Program and strategic reasons to participate;
assist in the examination of your corporate charter and determine whether shareholder approval is required to participate in the Program;
assist with completing the Application and investment agreement as necessary;
assist with the preparation and filing of any securities registration statements; and
review the impact of the Program on any employment agreements and compensation plans, and assist with any required amendments.

If you have any questions or would like additional information, please contact your Smith, Gambrell & Russell attorney or an attorney in the Financial Institutions Group.