Financial Services

What NH Bankers Need to Know About the TARP Capital Purchase Plan

November 2008

Denis Maloney of Gallagher, Callahan & Gartrell recently advised the principal officers of New Hampshire's leading financial institutions of the material terms, conditions and consequences of participation in the federal Treasury Department's Troubled Asset Relief Program ("TARP") Capital Purchase Plan ("CPP"). Below is a summary of the program with a downloadable Memorandum on the CPP (PDF file - 120K).

Treasury Department's Troubled Asset Relief Program (TARP) Capital Purchase Plan (CPP)

Under the general authorities of the TARP, the Treasury Department is willing to provide additional capital resources to interested, eligible financial institutions.

The terms of the CPP announced to date are focused primarily on a form of transaction in which Treasury purchases shares of senior preferred stock from the institution, such preferred shares paying a 5% dividend in the initial three years and rising to 9% thereafter. Treasury will also receive a form of "sweetener" with its investment — structured in the form of a "warrant" to purchase common shares of the institution (an increase in value of institution arguably will lead to an increase in value of common stock underlying the warrant — a sweetener for its owner).

The shares of preferred stock and the warrant/underlying common shares are required to be "registered" with the Securities and Exchange Commission in order that the Treasury can freely transfer and sell these securities. Among other things, participating financial institutions must also agree to certain additional compensation restrictions on their senior executive officers and dividend payments.

Commentators have stressed the inappropriateness of this "public company" model to the existing legal structures and non-public status of the majority of New Hampshire based banking institutions: "private" stock banks with minimal public trading float; mutually-owned banks and holding companies; and/or Sub-S structured institutions. In its release late on Friday, October 31, 2008, the Treasury Department announced the closing of several transactions under the CPP, and posted copies of the form of the documents to be used with participating public company financial institutions. Most importantly for NH banks, in the release the Treasury recognized the inapplicability of the public company CPP model to many potentially interested financial institutions and stated that it "will post an application form and term sheet for privately held eligible institutions at a later date and establish a reasonable deadline for private institutions to apply.”

For more information, please download Gallagher, Callahan & Gartrell's Memorandum on the CPP (PDF file - 120K) primarily applicable to publicly traded institutions.

The referenced Treasury press release can be found at this web page and sample form documents used for public company CPP transactions can be found on the Treasury page dedicated to the Emergency Economic Stabilization Act. It is expected that the executive compensations and dividend restrictions set forth in the CPP will also apply to "privately held eligible institutions."

*Denis J. Maloney is admitted in New Hampshire.

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