Learn more about Financial Institutions at Schiff Hardin. Attorneys In This Practice Darren C. Baker Lorraine M. Buerger Matthew Galo David S. McCarthy Gary L. Mowder Harold S. Nathan Peter L. Rossiter John M. Schietinger David H. Williams Jason L. Zgliniec Schiff Hardin Offices One Atlantic Center, Suite 2300 1201 West Peachtree Atlanta, GA 30309 225 Franklin Street, Suite 2600 Boston, MA 02110 6600 Sears Tower 233 S Wacker Drive Chicago, IL 60606 One Westminster Place Suite 200 Lake Forest, IL 60045 900 Third Avenue 23rd Floor New York, NY 10022 One Market, Spear Tower 32nd Floor San Francisco, CA 94105 1666 K Street, NW Suite 300 Washington, DC 20006 - - - - - - - - - Join our mailing list. Forward this alert to a friend or colleague. - - - - - - - - -

Schiff Hardin Financial Institutions Alert

Treasury Issues Capital Purchase Program Term Sheet for Privately Held Financial Institutions

On November 17, 2008, the U.S. Department of the Treasury ("Treasury") issued a term sheet and related Q & A guidance for participation in the Troubled Asset Relief Program ("TARP") Capital Purchase Program ("CPP") by privately held financial institutions. This alert provides a summary of the terms of CPP participation offered by Treasury to private banks and highlights the key similarities and differences between those terms and Treasury's previously announced terms of participation for publicly held institutions.

Qualifying Financial Institutions: The offered terms apply to qualifying financial institutions ("QFIs"), defined to include: (1) any top-tier bank holding company or top-tier savings and loan holding company that engages solely or predominately in activities permissible for financial holding companies and that is not publicly traded, (2) any U.S. bank or U.S. savings association organized in a stock form that is not controlled by a holding company and is not publicly traded, and (3) any U.S. bank or U.S. savings association that is not publicly traded and is controlled by a savings and loan holding company that is not publicly traded and does not engage solely or predominately in activities that are permitted for financial holding companies. A company is deemed "publicly traded" if (1) its securities are traded on a national securities exchange and (2) it is required to file, under the federal securities laws, periodic reports such as the annual (Form 10-K) and quarterly (Form 10-Q) reports with either the Securities and Exchange Commission or its primary federal bank regulator.

Note: The new term sheet does not cover mutual depository institutions or entities that have made elections under Subchapter S of the Internal Revenue Code of 1986, as amended ("S Corporations"). Participation in the CPP by S Corporations and mutual depository institutions is still under consideration by Treasury.

Application Deadline: A QFI desiring to participate in the CPP must submit an application to its primary federal bank regulator by December 8, 2008. Treasury has not yet issued the application form to be used by QFIs.

Similarities to Terms for Publicly Traded Institutions: The new term sheet for privately held QFIs is similar in many respects to the term sheet for publicly traded institutions under Treasury's previously announced guidance:

• Each QFI must offer for purchase Preferred Securities (liquidation value of $1000) representing between 1% and 3% of its risk-weighted assets, but no more than $25 billion.
• The Preferred Securities will be perpetual, will have limited voting rights and will be callable after three years.
• As a general matter, the terms with respect to regulatory capital treatment (Tier 1), dividend rates (5% for five years and 9% thereafter), the senior status of the Preferred Securities (senior to common stock and pari passu with existing preferred stock that do not by their terms rank junior), dividend restrictions on junior securities and redemption are the same as those for publicly traded institutions, with some dates adjusted to reflect the later date of this term sheet.
• Executive compensation restrictions are also the same as those applicable to public institutions. QFIs must adopt the executive compensation and corporate governance standards set forth in the Emergency Economic Stabilization Act of 2008, including the following with respect to senior executive officers (the CEO, CFO and next three most highly compensated officers): (1) ensuring incentive compensation does not encourage unnecessary and excessive risks, (2) repayment or "clawback" provisions for bonuses or incentive compensation based on earnings, gains or other criteria later proven to be materially inaccurate, (3) prohibitions on golden parachute payments, and (4) disallowance of tax deductions for compensation in excess of $500,000 per year.

Key Differences from the Terms for Publicly Traded Institutions: Key differences between this new term sheet and the term sheet for publicly traded QFIs are as follows:

• Dividend Restrictions — As is the case for publicly traded institutions, Treasury consent is required for dividend increases in the first three years. From the third anniversary to the tenth anniversary of the issuance, Treasury's consent is required for any increase in aggregate common dividends per share greater than 3% per annum (provided that no increase in common dividends may be made as a result of any dividend paid in common shares, any stock split or similar transaction). From and after the tenth anniversary of the issuance, the QFI may not pay common dividends or repurchase any equity securities or trust preferred securities until all equity securities held by Treasury are redeemed in whole or Treasury has transferred all of the equity securities to third parties.
• Repurchase Limitations — For ten years following the issuance of the Preferred Securities, Treasury's consent is required before a privately held QFI can repurchase equity securities or trust preferred securities (unless the Preferred Securities and related warrants are earlier redeemed or transferred by Treasury). For publicly traded QFIs, repurchase limitations applied for three years.
• Voting Rights — As with Preferred Securities issued by publicly traded institutions, Preferred Securities issued by privately held QFIs will have limited voting rights, and, if dividends on the Preferred Securities are not paid in full for six dividend periods (whether or not consecutive), the Preferred Securities will have the right to elect two directors. However, the right to elect directors will end only when full dividends have been paid for (1) all prior dividend periods in the case of cumulative Preferred Securities or (2) four consecutive dividend periods in the case of non-cumulative Preferred Securities.
• Related Party Transactions — As long as Treasury holds any equity securities of the QFI, the QFI and its subsidiaries may not enter into transactions with related persons (within the meaning of Item 404 under the SEC's Regulation S-K) unless (1) such transactions are on terms no less favorable to the QFI and its subsidiaries than could be obtained from an unaffiliated third party, and (2) have been approved by the audit committee or comparable body of independent directors of the QFI.
• Transferability of Preferred Securities — The Preferred Securities will not be subject to any contractual transfer restrictions or restrictions of any stockholders' agreement (or similar arrangement) in effect among the QFI and its stockholders. Treasury and its transferees may not, however, effect any transfer that would require the QFI to become subject to periodic reporting requirements of the Exchange Act.
• Registration — If the QFI becomes subject to Exchange Act periodic reporting requirements, then the QFI will file a shelf registration statement covering the Preferred Securities as promptly as practicable and, if necessary, take all action required to cause such shelf registration statement to be declared effective as soon as possible. Treasury and its transferees will have piggyback registration rights.

Warrant Terms: Like the warrants of publicly traded institutions, warrants to be issued to Treasury by privately held QFIs will have a ten year term and are immediately exercisable, in whole or in part. The following are distinctive features of the warrants issuable by privately held QFIs:

• The warrants issued by privately held QFIs grant to Treasury or its transferee the right to acquire shares of preferred stock of the QFI (the "Warrant Preferred"), as opposed to common stock. The Treasury intends to exercise the warrants immediately.
• The number of shares of Warrant Preferred will have an aggregate liquidation preference equal to 5% of the amount of Treasury's investment in the Preferred Securities.
• The initial exercise price per share of Warrant Preferred will be the greater of $0.01 and the par value per share of Warrant Preferred required by the QFI's charter.
• The Warrant Preferred will have the same rights, preferences, privileges, voting rights and other terms as the Preferred Securities originally issued to Treasury, except that (1) the Warrant Preferred will pay dividends at a rate of 9% per annum and (2) the Warrant Preferred may not be redeemed until all Preferred Securities have been redeemed.
• The warrants and the Warrant Preferred will be subject to the same transfer restrictions and registration rights as set forth above for the Preferred Securities.

Community Development Financial Institutions: If the QFI meets the following requirements, then Treasury will not require the issuance of the warrants to purchase the Warrant Preferred: (1) the size of Treasury's investment is $50 million or less; and (2) the QFI is a certified Community Development Financial Institution ("CDFI"), defined as a specialized financial institution that works in market niches that are underserved by traditional financial institutions and provides a unique range of financial products and services in economically distressed target markets, such as mortgage financing for low-income and first-time homebuyers and not-for-profit developers, flexible underwriting and risk capital for needed community facilities, and technical assistance, commercial loans and investments to small start-up or expanding businesses in low-income areas.

ABOUT SCHIFF HARDIN LLP

Schiff Hardin LLP provides services to banks, savings associations and other types of financial institutions nationwide and internationally. In addition to our traditional strengths in mergers and acquisitions, securities and financings, bank regulatory compliance, and trust department counseling, we have a particular and increasing focus on corporate governance and fiduciary litigation. Our Finance Group also supports our financial institutions clients in all aspects of their credit and lending businesses, and our Securities and Futures Regulation Group assists them in their securities, investment management and commodities-related businesses. We represent some of the largest banking organizations in the U.S. and overseas, and many community banks and thrifts.

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