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10.23.2008 | Legal Update

The Capital Purchase Program (CPP) administered by the U.S. Department of the Treasury will use up to $250 billion authorized by Congress to purchase senior preferred stock from eligible financial institutions under standardized terms (click here for a copy of the October 16 Special Edition of the Nutter Bank Report describing the terms of the CPP).  Eligible institutions may apply to receive an equity investment from Treasury in an amount equal to between 1% and 3% of each institution’s risk-weighted assets, capped at $25 billion.  Applications by banks and savings institutions to participate in the CPP must be submitted by 5:00 p.m. on November 14 (click here for a copy of the application form and guidelines).  The $250 billion available under the program was calculated by Treasury to be sufficient to fund the maximum permissible investment in each institution if every U.S. banking company participates.

Nutter Notes:  On October 20, the federal bank and thrift regulatory agencies issued a joint statement encouraging all eligible institutions to apply to participate in the Treasury’s CPP.  Federal officials have emphasized that the CPP is intended to attract broad participation by healthy institutions.  Treasury hopes the CPP will increase confidence in banks and thrifts, help attract private capital to them, and lead to increased lending to benefit the U.S. economy.

1.  Is My Institution Eligible to Participate in the CPP?

Only “Qualifying Financial Institutions” (QFIs) are eligible to participate in the CPP.  These institutions include banks, savings institutions, bank holding companies, financial holding companies, and savings and loan holding companies that engage solely or predominately in activities that are permissible for financial holding companies under applicable law.  To qualify, an applicant must be established and operating in the United States and may not be controlled by a foreign bank or company.  The standardized terms initially released by the Treasury were drafted with publicly traded banking companies in mind.  Later, however, senior Treasury officials stated that the CPP is intended to provide capital to a broad array of healthy depository institutions, including mutual holding companies as well as privately held banks and bank holding companies.

Nutter Notes:  An institution that receives an investment under the CPP must also issue to the Treasury warrants to purchase shares of the institution’s common stock that then have an aggregate market value equal to 15% of the senior preferred stock investment.  Registration requirements and other standardized terms of the senior preferred stock and warrants suggest that QFIs must be companies the securities of which are publicly traded.  The Treasury has not yet determined how a mutual, private or closely held financial institution will be eligible to participate in the CPP.  Senior Treasury officials have stated that the Treasury is actively considering how the standardized terms of the CPP might be modified to accommodate mutual, Subchapter S corporation, privately held and non-publicly traded banks, thrifts and holding companies.

2.  What Does This Mean for My Institution?

Each eligible institution should consider whether it is in the best interests of the institution to participate in the CPP.  Eligible institutions that do not apply to participate and later suffer material deterioration in any regulatory capital measurement may be vulnerable to regulatory criticism that they failed to apply for CPP funding when it was available.  If an institution is unable to decide whether to apply or it is unclear whether the institution is eligible to participate, the institution should consider submitting an application for CPP funding before the deadline.  The application can be withdrawn if the board of directors later determines not to participate or the institution is ineligible.

Nutter Notes:  CPP participants will sell senior preferred stock to the Treasury, so their charter documents must authorize the issuance of preferred shares.  If an institution’s charter does not authorize the issuance of preferred stock under the standardized terms of the program, or does not authorize a number of shares sufficient to receive the amount requested under the CPP, the institution would need to amend its charter.  Charter amendments may require a shareholder or member vote and regulatory approval, depending upon the nature of the organization.  For banks and thrifts that are controlled by a stock holding company, the senior preferred stock and warrants would be issued by the stock holding company.  Stock-form banks and thrifts that are not controlled by a stock holding company would issue the senior preferred stock and warrants directly.  Presumably, a bank or thrift in the mutual holding company form would issue the preferred stock through its mid-tier stock holding company (if there is one) or otherwise directly by the bank or thrift.  The Treasury has not yet determined whether or how mutual banks and thrifts that are not in a holding company structure may participate in the CPP.

3.  How Do We Apply for an Investment under the CPP?

Treasury and the bank and thrift agencies issued CPP application guidelines and an application form on October 20.  Those documents are available on the Treasury’s website here, and on the websites of the bank and thrift agencies.  The application form is only two pages long and requires contact information for the applicant, the amount of capital requested, information about the applicant’s authorized capital and information about risk-weighted assets.  Applications and questions should be directed to the institution’s primary federal regulator, as follows:

• If regulated by the Federal Reserve, contact your local Reserve Bank about the CPP.
• If regulated by the FDIC, contact the appropriate regional office for your institution.
• If regulated by the OCC, contact Fred Finke (fred.finke@occ.treas.gov) for more information and send applications to HQ.Licensing@occ.treas.gov or OCC Director of Licensing, 250 E St. SW, Mail Stop 7-13, Washington DC, 20219-0001.
• If regulated by the OTS, contact the appropriate regional office for your institution.

The Treasury and the other agencies will soon publish a standard form of investment agreement that will be used to document the government’s investment.  The closing documents have not yet been released, but copies of other materials describing eligibility and the terms of the CPP are available on the Treasury’s website at http://www.treas.gov/initiatives/eesa/, and on the websites of the bank and thrift agencies.  Those materials include:

•  the term sheet for the senior preferred stock and warrants (click here);
• answers to frequently asked questions (click here);
• EESA tax guidance (click here);
• interim rules on executive compensation applicable to CPP participants (click here); and
• the text of the EESA (click here).

4.  What Is the Process After We Apply?

The Treasury announced that it intends to fund the purchase of senior preferred stock by the end of 2008.  Treasury will determine the eligibility and allocation of investments to interested institutions after considering recommendations from the federal bank and thrift agencies on each application.  If an applicant receives preliminary approval to participate in the CPP from Treasury, the applicant will have 30 days from the date of notification to submit the investment agreements and related documentation.  Institutions with less than $1 billion in assets that serve low- to moderate-income populations and other underserved communities that were well or adequately capitalized as of June 30, 2008, and have dropped or will drop one or more regulatory capital levels because of depreciation in FNMA or FHLMC equity securities, are subject to special consideration for a CPP investment and should note that status in their application materials.

Nutter Bank Report

Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP.  Chambers and Partners, the international law firm rating service, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation in the 2007 Chambers and Partners U.S. rankings.  The “well known and well-versed” Nutter team “excels” at corporate and regulatory banking advice, according to the 2007 Chambers Guide.  Visit the 2007 U.S. rankings at ChambersandPartners.com.  The Nutter Bank Report is edited by Matthew D. Hanaghan.  The information in this publication is not legal advice.  For further information, contact the practice co-chairs:

Kenneth F. Ehrlich  
kehrlich@nutter.com 
Tel: (617) 439-2989 

Michael K. Krebs
mkrebs@nutter.com
Tel: (617) 439-2288