Nutter Bank Report, Special Edition: Treasury Releases CPP Terms for Mutual BanksPrint PDF
The Treasury Department on April 14 published term sheets for mutual banks to receive TARP investments under the Capital Purchase Program (CPP). Mutual banks that choose to participate will issue subordinated debt instruments to the Treasury. The subordinated debt will qualify as Tier 2 capital only. The application deadline for mutual banks is 5:00 p.m. (EST) on May 14, 2009.
1. Key Terms
Under the program, a mutual bank is eligible to receive an investment equal to at least 1% of risk-weighted assets, up to the lesser of $25 billion or 3% of risk-weighted assets. A CPP application must be submitted to the bank’s primary federal banking regulator. Upon approval, the bank will be required to enter into a standard form of securities purchase agreement and other closing documents, and issue to Treasury senior subordinated debentures and warrants to purchase additional senior subordinated debentures in an amount equal to 5% of the amount of the initial investment. Treasury intends to immediately exercise the warrants for the additional senior subordinated debentures. The senior subordinated debentures will rank senior to mutual capital certificates or any other capital instruments authorized by state law, and subordinate to all other senior indebtedness of the bank (unless the terms of the other debt obligations expressly make them pari passu or subordinate to the senior subordinated debentures). The senior subordinated debentures will have a maturity of 30 years.
Nutter Notes: Interest will be payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year at a rate of 7.7% per annum until the fifth anniversary of the date of issuance, and then at a rate of 13.8% per annum. Interest on the debentures issued upon exercise of the warrants will be 13.8% per annum from the date of issuance. Interest may be deferred for up to 20 quarters, but unpaid interest will cumulate and compound at the interest rate then in effect. The issuer’s authority to declare or pay dividends on any capital instruments is limited unless all interest on the debentures is fully paid. As long as the Treasury holds any senior subordinated debentures, the bank may not enter into any transactions with a related person unless the transaction is on market terms and has been approved by the bank’s audit committee or a comparable body of independent directors. If the bank becomes subject to the periodic reporting requirements under the federal securities laws, it will be required to promptly file shelf registration statements covering the senior subordinated debentures. Treasury will have piggyback registration rights and the bank will be required to take any steps reasonably requested by Treasury to facilitate a transfer of the senior subordinated debentures.
2. Executive Compensation and Corporate Governance
Any mutual bank that receives a CPP investment from Treasury will be required to comply with the limitations on executive compensation, transparency, accountability and monitoring set forth in the Emergency Economic Stabilization Act, as amended (EESA), and any guidance or regulations issued by the Treasury to carry out those requirements. The bank and its senior executive officers will also be required to execute a waiver releasing the Treasury from any claims they may otherwise have as a result of any modification of benefit plans and other compensation arrangements or agreements necessary to comply with the requirements of the EESA and Treasury’s guidance or regulations. The EESA requires each selling institution to meet “appropriate standards” for executive compensation and corporate governance. Those standards must include provisions to recover or “claw back” bonus or incentive compensation paid to any of the mutual institution’s senior executive officers and any of its next 20 most highly compensated employees based on statements of earnings, gains or other criteria that are later proven to be materially false, as well as a prohibition on any golden parachute payments to senior executive officers or to any of the institution’s next five most highly compensated employees during the period that Treasury holds an investment in the institution.
Nutter Notes: The EESA was amended by the American Recovery and Reinvestment Act of 2009 to further prohibit each CPP participant from paying or accruing any bonus, retention award or incentive compensation to a specified number of employees, and to prohibit any compensation plan that would encourage manipulation of reported earnings in order to enhance the compensation of any employees. The interim final rule on executive compensation requirements published by Treasury also requires that the compensation committee of the board of directors of the institution (or a comparable board committee) meet with the institution’s senior risk officers within 90 days after the issuance of the debentures and at least annually thereafter to ensure that incentive compensation does not encourage excessive risks that threaten the value of the institution. The compensation committee of the board of directors of the institution must provide certifications of that assessment. A mutual bank would file the certifications with its primary federal regulator.
Nutter Bank Report
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