January 14, 2009

The Treasury Department issues its term sheet for qualified financial institutions (QFI) that are Subchapter S corporations applying to the Capital Purchase Program.

• Terms are set forth on a standardized term sheet
• Terms do not apply to mutual organizations
• Application deadline is February 13, 2009
• Unlike other term sheets for the CPP, this sheet provides for issuances of debt instead of stock
• Key terms are as follows:
• QFI may issue subordinated debentures (senior securities) with an aggregate principal amount equal to not less than 1 percent of its risk-weighted assets and not more than the lesser of (1) $25 billion and (2) 3 percent of its risk-weighted assets
• Each note representing a senior security will be in the principal amount of $1,000
• The senior securities qualify as Tier 2 capital at a bank or savings association and Tier 1 capital at a holding company.  It will be necessary for the appropriate federal banking agency to issue an interim final rule designating the senior securities as Tier 1 capital for holding companies
• The senior securities mature in 30 years and pay interest at a rate of 7.7 percent per annum until the fifth anniversary of the date of the investment, and thereafter at a rate of 13.8 percent per annum.  Interest will be payable quarterly in arrears
• Interest may be deferred on the senior securities for up to 20 quarters.  Unpaid interest shall cumulate and compound at the then applicable interest rate in effect.  As long as interest is deferred, no dividends may be paid on QFI shares of equity or trust preferred securities
• The senior securities may not be redeemed for a period of three years from the date of the investment (with certain exceptions).  After the third anniversary of the date of the investment, the senior securities may be redeemed in whole or in part at the option of the QFI 
• All redemptions shall be 100 percent of their issue price, plus any accrued and unpaid interest.  All redemptions are subject to the approval of the QFI’s appropriate federal banking agency
• No dividends may be declared or paid on any shares of equity or trust preferred securities nor may the QFI repurchase or redeem any shares of equity or trust preferred securities unless all accrued and unpaid interest for all past interest periods on the senior securities is fully paid
• The Treasury’s consent is required for any increase in regularly paid common dividends per share with certain exceptions and conditions
• Principal and accrued interest may only become immediately due and payable upon bankruptcy or liquidation of a holding company, receivership of a bank or savings institution, or deferral of interest for more than 20 quarters 
• The Treasury’s consent is required for any repurchases of equity securities or trust preferred securities until the 10th anniversary (unless prior to the 10th anniversary the senior securities are redeemed in whole or transferred to third parties)
• From and after the 10th anniversary of the date of investment, the QFI is prohibited from paying common dividends or repurchasing any equity securities or trust preferred securities until all the senior securities and warrant securities are redeemed or repurchased in whole
• The Treasury will receive warrants to purchase additional senior securities at an amount equal to 5 percent of the amount of senior securities purchased on the date of investment.  The exercise price for the warrants will be $.01 per note representing a warrant security.  The Treasury intends to immediately exercise the warrants
• The warrant term will be 10 years (warrant securities themselves will have a maturity of 30 years)
• The warrant securities will pay interest at a rate of 13.8 percent per annum and may not be redeemed until all the senior securities have been redeemed

Visit http://www.treasury.gov/press/releases/hp1354.htm to view the U.S. Department of Treasury news release on the capital purchase program.