Raising Capital: How the Rules Have Changed
Illinois Bankers Association, Capital Raising
Forum, August 20, 2010
Presented By:
Dave Muchnikoff, Silver, Freedman & Taff, L.L.P. (202) 295-4513 – dmm@sftlaw.com
Allen Laufenberg, Stifel Nicolaus Weisel (312) 269-0381 – aglaufenberg@stifel.com
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Where We Are Today
Some signs of improvement but still many challenges expected:
Recession behind us?
How robust will the recovery be?
FDIC insurance fund stabilized with special assessment and prepayments
Macro-economic issues will continue to impact the industry
More credit problems coming
Housing prices – Where is the bottom? When will things start to improve?
Many more bank failures expected
 At March 31, 2010, “Problem List” was at 15-year high of 775 institutions with
total assets of $431.2 billion
 Many are facing slow balance sheet growth, flat fee revenue and rising regulatory
expense burden
 Significant industry-wide capital need
 Regulatory reform has injected further uncertainty
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Capital Planning
Capital is King, and will be for the foreseeable future
 Bolster current capital position; don’t under-estimate need for capital
 Those with capital can be proactive, those without will be reactive
 Threshold question for regulatory permission to do anything is “what is your
capital position?”
What are your regulatory capital requirements and
have you accounted for anticipated regulatory
change?
 Tier 1 Leverage Ratio > 5%
 Tier 2 Risk-Based Capital Ratio > 6%
 Total Risk-Based Capital Ratio > 10%
 Counter-cyclical requirements?
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Capital Planning (cont.)
Survivability means capital and tangible book
value
 How fast are you planning to grow and how will you achieve
your growth?
 What are your potential sources of capital and how available
are they?
Risk profile matters: financial institutions with
capital cushions, “clean” balance sheets and
transparent, low-risk strategies have been,
and will continue to be, rewarded by the
markets relative to peers
Are there risks within your balance sheet or
operating strategies that could threaten your
capital position?
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Capital Planning (cont.)
Position your company to take advantage of
opportunities
 How can your capital position be improved without raising new
capital?
oRestructure balance sheet through shrinkage, securitization, asset
sales, etc.
oConstrain growth and build capital through retained earnings
Improve earnings growth through efficiencies (cost cuts,
product/service changes)
Cut current cash dividend to conserve capital
oConvert hybrid securities or other securities into common equity (e.g.,
warrants, convertible preferreds or convertible debt, stock options)
oLock in fixed rates on existing floating rate securities at current low
rates
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Capital Planning (cont.)
The type/structure of capital instrument will be
influenced by many factors:
oHow much additional capital is needed?
Be aggressive in your assessment of existing balance sheet
risk – investors will be
oRegulatory requirements: what type of “qualified capital” do
you need and at what level?
oCurrent corporate structure, financial condition and capital
structure
oMarket conditions: Is there a market for the capital instrument?
oCosts and impact on the organization
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Types of Capital Being Raised by Banks & Thrifts
o Common equity is taking an increased role in bank capital raising as
regulatory agencies and investors focus on the TCE ratio
TruPS market dislocation in 2008 and now the Collins Amendment
eliminate the once popular source of Tier 1 Capital
Since the beginning of the recession in 2008 5x as much common
equity has been raised as was raised in the first 8 years of the
decade combined
Total Capital Raised by Banks & Thrifts
Cumulative Capital Raised
2000 - Present
363.0
($B)
400
350
300
210.4
250
166.3
200
150
100
50
2000
Source: SNL Financial
2001
2002
2003
2004
Trust Preferred
Preferred
2005
2006
2007
2008
2009
Common Equity
TARP Preferred
2010
Common &
Trust
TARP
Preferred
Preferred
Preferred
Common Equity
Preferred
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Capital Planning (cont.)
Why Raise Capital Now?
o Leverage “relationship based” community banking model by increasing
market share through strategic acquisitions and organic growth.
o Current market conditions will likely lead to increase failures, branch sales
and whole bank/thrift mergers at attractive pricing levels. Augment
potential strategic acquisitions with organic growth as distressed
competitors are eliminated from the marketplace or have a decrease
capacity to effectively compete.
o Expansion capital investors are looking for management with extensive
banking experience including in negotiating and integrating mergers and
acquisitions and significant involvement in credit risk management and
bank workout situations.
o Take advantage of FDIC-assisted transactions, privately negotiated
acquisitions or other business opportunities in your market area.
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Investors Value Balance Sheet Strength
Asset Quality Stratification
151%
< 1.0%
> 150%
135%
1.0% - 2.0%
Reserves/NPLs %
105%
2.0% - 3.0%
NPAs/Assets
Reserve Coverage Stratification
96%
3.0% - 4.0%
4.0% - 5.0%
82%
5.0% - 6.0%
81%
0%
50%
125% - 150%
126%
100% - 125%
126%
75% - 100%
126%
101%
50% - 75%
77%
30% - 50%
49%
> 6.0%
160%
56%
< 30%
100%
150%
Price/Tangible Book
Source: SNL Financial. Data represents median values
200%
0%
50%
100%
150%
200%
Price/Tangible Book
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Investors Value Balance Sheet Strength
TCE Ratio Stratification
> 10.0%
123%
9.0% - 10.0%
Texas Ratio %
99%
76%
5.0% - 6.0%
0%
50%
45% - 60%
57%
60% - 75%
54%
50%
75% - 90%
45%
< 5.0%
94%
30% - 45%
110%
6.0% - 7.0%
114%
15% - 30%
128%
7.0% - 8.0%
144%
< 15%
100%
8.0% - 9.0%
TCE Ratio %
Texas Ratio Stratification
39%
> 90%
100%
150%
Price/Tangible Book
Source: SNL Financial. Data represents median values
200%
0%
50%
100%
150%
200%
Price/Tangible Book
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Types and Sources of Capital:
Types:
• Debt
• Preferred Stock
• Common Stock
Sources:
• Rights Offering
• Private Offering
• Regulation D or Rule 144A
• Underwritten
• Public markets
• Private equity investors
• Institutional investors
• Correspondent banks
Alternative Source:
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• Sale of Assets / Franchise
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Senior Debt
Benefits
 Issued by HC with proceeds
down-streamed to subsidiary
bank
 Maturity typically up to 10 years
 Downstreamed proceeds count
as Tier 1 capital at bank level,
no capital treatment at holding
company level
 Interest payments are taxdeductible
 No change to ownership
structure
Considerations
 Can you raise enough?
 Not permanent capital, must
have ability to repay or refinance
 Must be able to dividend funds
from bank to service debt
 Will not solve a capital issue at
the holding company level
 Earnings dilutive unless
leveraged to break even or
better
 Limited market for small
companies; usually obtained as
a loan from another financial
institution
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Subordinated Debt
Benefits
 May be issued by HC or Bank
 Maturity must be minimum of 5
years, typically 10-15 years
 If issued by HC, is considered
Tier 2 capital at holding
company level; proceeds can be
contributed to bank as Tier 1
capital. If issued by bank, is
considered Tier 2 capital
 Interest payments are taxdeductible
 No change to ownership
structure
Considerations
 Can you raise enough?
 Not permanent capital, must
have ability to repay or refinance
 If Tier 2 capital, sub debt limit
equals 50% of Tier 1 capital;
capital qualification is reduced
20% annually during last 5 years
to maturity
 Impact on earnings of interest
cost; must be able to service
debt at issuer level
 Limited market for small
companies; usually privately
placed with another community
financial institution or a private 13
investor
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Preferred Stock
Benefits
 Increases tangible equity without
increasing common shares
 Non-cumulative perpetual
preferred counts as Tier 1 capital
 Can structure to be convertible
into common stock, either
mandatorily or at the option of the
holder
Considerations
 Higher current cash cost
relative to issuance of common
stock
 Dividends are paid in after-tax
dollars
 Informal guidance from the Fed
suggests that trust preferred
and non-cumulative perpetual
preferred securities should not
exceed 40% of the pro forma
Tier 1 capital
 Limited market for smaller
companies
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Common Stock – Follow-on Offering
Benefits
 Provides Tier 1 capital in form
most favored by regulators
 Represents permanent capital
 Can be issued using a variety of
structures:
•Private placements
•“Overnight” public issuances
(utilizing a shelf registration)
•At-the-market transactions
(ATMs)
•Standard public offerings (not
utilizing a shelf registration)
•Rights offerings
Considerations
 Concerns about dilution to
existing shareholders
 Current stock prices at or near
multi-year lows for most
companies
 Potential concern over ability to
effectively deploy “excess”
capital
 Market conditions
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Sale of Branches / Assets
Benefits
 Creates common capital without
diluting current shareholders
 Assets sold reduce risk-weighted
assets providing relief in the
denominator as well
 Allows management to focus on
core assets in the future
 Examples:
Branch Sales
Sale of non-core business lines
Considerations
 Buyers in franchise sales not
acquiring non-performing
assets, reducing near-term core
profitability
 Will likely need to “right-size”
operational infrastructure
 Buyers may ask for a discount
even on performing assets
 Difference between assets
acquired and liabilities assumed
will need to be bridged with
cash/securities, impacting the
company’s future liquidity
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Sale of Branches– Summary Statistics
Since the beginning of 2009, there have been
127 announced branch sales, 66 of which have
announced the deposit premium:
oMedian premium to deposits of 3.44%
4.00% for 2010
4.05% for those transactions where loans were acquired
o85 of the 127 transactions have involved loans and deposits
Median loans transferred as % of deposits (for 66 deals with
announced premiums) is only 41.45%
Transferred loans have been performing loans, sometimes at
a discount
• CenterState transaction announced 8/8/10 involved
$125M of performing loans at a 10% discount to par
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Source: SNL Financial
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Sale of Branches– Multiple History
o As the table below highlights, multiples in branch transactions have
declined to well below their historical levels during the recent
recession
# of Transactions
180
Deposit Premium Paid
8.00%
160
6.70%
140
5.78%
120
9.00%
7.92%
6.00%
7.26%
8.00%
7.00%
7.00%
5.64%
6.00%
5.00%
100
4.00%
3.40%
80
5.00%
4.00%
60
3.00%
40
2.00%
20
1.00%
0
0.00%
2000
2001
2002
2003
# of Transactions
Source: SNL Financial
2004
2005
2006
2007
2008
2009
2010 YTD
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Median Deposit Premium
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Sample Term Sheet: Your Series A Non-Cumulative
Perpetual Convertible Preferred Stock
Issuer
Your Bank (or Holding Company)
Title of Securities
X.XX% Series A Non-Cumulative Perpetual Convertible Preferred Stock (the “Preferred Stock”)
Number of shares
issued
10,000 shares of Preferred Stock
Price to Public
Anticipate 100% of liquidation preference ($1,000 per share)
Aggregate liquidation
preference offered
$10,000,000 of liquidation preference
Annual dividend rate
(Non-Cumulative)
X.XX% on the per share liquidation preference of $1,000 per share
Dividend Payment
Dates
Quarterly
Maturity
Perpetual
Liquidation preference
per share
$1,000 plus unpaid dividends, if any
Liquidation Rights
In the event of voluntary or involuntary liquidation, dissolution or winding-up, holders of the Preferred
Stock will be entitled to receive, out of our assets that are legally available for distribution to
stockholders, before any distribution is made to holders of our common stock or other junior
securities, a liquidating distribution in the amount of $1,000 per share of the Preferred Stock plus any
declared or unpaid dividends, without accumulation of any undeclared dividends (before any
distributions to holders of any junior securities). Distributions will be made pro rata as to the
Preferred Stock and any other parity securities and only to the extent of our assets, if any, that are
available after satisfaction of all liabilities to creditors.
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Your Series A Non-Cumulative Perpetual Convertible Preferred Stock (cont.)
Voting Rights
Except as otherwise required by law, a holder of Preferred Stock will have voting rights only
in the case of certain dividend clearages under certain limited circumstances.
In addition, holders of Series A Preferred Stock will also be entitled to vote separately as a
class in connection with certain corporate events or actions. Specifically, the consent of the
holders of at least a majority of the Series A Preferred Stock, voting as a class, is required to
(i) amend, alter, repeal or otherwise change any provision of our Articles of Incorporation or
Certificate of Determination in a manner that would adversely affect the rights, preferences,
powers or privileges of the Series A Preferred Stock or (ii) create, authorize, issue or increase
the authorized or issued amount of any class or series or equity securities that is senior or
equal to the Series A Preferred Stock as to dividend rights, or rights upon our liquidation,
dissolution or winding-up.
Ranking
The Preferred Stock will rank, with respect to the payment of dividends and distributions upon
liquidation, dissolution or winding-up:
•Junior to all our existing and future debt obligations
•Junior to each class of capital stock or series of preferred stock, the terms of which
expressly provide that it ranks senior to the Preferred Stock and
•Senior to all classes of our common stock or series of preferred stock, the terms of which do
not expressly provide that it ranks senior to or on a parity with the Preferred Stock.
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Your Series A Non-Cumulative Perpetual Convertible Preferred Stock (cont.)
Dividends
Dividends are payable semi-annually, when, as and if declared, on the last day of March and September of
each year, commencing March 31, 2011. Dividends are cumulative and are payable if, when and as
authorized by our Board of Directions. Therefore, if no dividend is declared by our board of directors on the
Series A Preferred Stock for a dividend period, dividends for that period will be accrued and payable when
dividends are declared for any subsequent period. Dividends may not be paid on our common stock or any
other capital security which ranks junior to the Series A Preferred Stock for any dividend period until full
dividends with respect to the Series A Preferred Stock have been declared and paid or set apart for payment.
[So long as any shares of Series A Preferred Stock are outstanding, if we declare any dividends on our
common stock or make any other distribution to our common shareholders, the holders of the Series A
Preferred Stock will be entitled to participate in such distribution on an as-converted basis.]
Dividend Stopper
So long as any share of Preferred Stock remains outstanding,
No dividend will be declared and paid or set aside for payment and no distribution will be declared and made
or set aside for payment on any junior securities (other than a dividend payable solely in shares of junior
securities) and
No shares of junior securities will be repurchased, redeemed, or otherwise acquired for consideration by us,
directly or indirectly (other than (a) as a result of a reclassification of junior securities for or into other junior
securities, or the exchange or conversion of one share of junior securities for or into another share of junior
securities, (b) repurchases in support of our employee benefit and compensation programs and (c) through the
use of proceeds of a substantially contemporaneous sale of other shares of junior securities), unless, in each
case, the full dividends for the most recent dividend payment date on all outstanding shares of the Preferred
Stock and parity securities have been paid or declared and a sum sufficient for the payment of those dividends
has been set aside.
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Lock-ups
The Issuer and each of its executive officers and directors will agree not to sell any preferred stock or common
stock for 90 days following the issuance date.
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Your Series A Non-Cumulative Perpetual Convertible Preferred Stock (cont.)
Redemption
With prior regulatory approval, if required, the Preferred Stock is redeemable at the
Bank’s option at any time, in whole or in part, on or after December 31, 2015, at
$10.00 per share, plus accrued and unpaid dividends, if any. Holders of the Preferred
Stock will have no right to require redemption of the Preferred Stock.
Conversion right at Holder’s
Option
Each share of the Preferred Stock may be converted at any time, at the option of the
holder, into shares of common stock (which reflects an approximate initial conversion
price of $XX.XX per share of common stock) plus cash in lieu of fractional shares,
subject to anti-dilution adjustments.
Mandatory conversion at
Issuer’s option
On or after Month XX, 2013, the Bank may, at its option, at any time or from time to
time cause some or all of the Preferred Stock to be converted into shares of common
stock at the then applicable conversion rate if, for 20 trading days within any period of
30 consecutive trading days, including the last trading day of such period, ending on
the trading day preceding the date the Bank gives notice of mandatory conversion,
the closing price of common stock exceeds 130% of the then applicable conversion
price of the Preferred Stock.
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Your Series A Non-Cumulative Perpetual Convertible Preferred Stock (cont.)
Anti-Dilution Adjustments
The conversion rate may be adjusted in the event of, among other things:
• dividends or distributions in common stock or cash, debts or other property;
• certain issuances of stock purchase rights;
• certain self tender or exchange offers; or
• increases in cash dividends on our common stock;
• subdivisions, splits and combinations of the common stock.
Limitation on Beneficial
Ownership
No holder of the Preferred Stock will be entitled to receive shares of our common stock
upon conversion to the extent (but only to the extent) that such receipt would cause
such converting holder to become, directly or indirectly, a “beneficial owner” (within the
meaning of Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder) or more than 9.9% of the shares of our common stock
outstanding at such time. Any purported delivery of shares of our common stock upon
conversion of the Preferred Stock shall be void and have no effect to the extent (but only
to the extent) that such delivery would result in the converting holder becoming the
beneficial owner of more than 9.9% of the shares of common stock outstanding at such
time.
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Your Series A Non-Cumulative Perpetual Convertible Preferred Stock (cont.)
Reorganization Events
Upon:
(1) any consolidation or merger of us with or into another person in each case pursuant to which
our common stock will be converted into cash, securities or other property;
(2) any sale, transfer, lease or conveyance to another person of all or substantially all of our
property and assets in each case pursuant to which our common stock will receive a distribution of
cash, securities or other property; or
(3) certain reclassifications of our common stock or statutory exchanges of our securities;
each share of the Preferred Stock outstanding immediately prior to such reorganization event,
without the consent of the holders of the Preferred Stock, will become convertible into the kind and
amount of securities, cash and other property or assets that a holder (that was not the counterparty
to the reorganization event or an affiliate of such other party) of a number of shares of our common
stock equal to the conversion rate per share of Preferred Stock prior to the reorganization event
would have owned or been entitled to receive upon the reorganization event.
Preemptive Rights
Holders of the Preferred Stock have no preemptive rights.
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Sample Term Sheet: Your Corporation Senior Debt
Debentures Offered
Convertible Senior Debentures due 2030.
Maturity Date
December 1, 2030
Interest Payment
Dates
June 1 and December 1 of each year, commencing December 1, 2010.
Conversion Rights
The debentures are convertible into common stock at any time prior to maturity, unless
previously redeemed. The debentures are convertible into our common stock at a conversion
rate of 100 shares of common stock for each $1,000 principal amount of debentures (equivalent
to a conversion price of $10.00 per share), subject to adjustment in certain events described
herein, unless previously redeemed.
Optional
Redemption by us
Subject to any required prior regulatory approval, the debentures may be redeemed at our
option, whole or in part, at any time on or after December 1, 2020 at the redemption price equal
to 100% of the principal amount of the debentures to be redeemed, plus accrued and unpaid
interest, if any, to by excluding the redemption date.
Mandatory
Redemption
None
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Senior Debt (cont.)
Fundamental
change
If at any time after the earlier of (i) December 19, 2013 and (ii) the date on which all of the
shares of the TARP Preferred Stock have been redeemed by us or transferred by Treasury to
third parties, we undergo a fundamental change (as defined below), holders may require us to
repurchase all or a portion of their debentures at a repurchase price equal to 101% of the
principal amount of the debentures to be repurchased plus any accrued and unpaid interest, if
any, to, but excluding, the repurchase date.
Ranking
The debentures will rank:
•Senior in right of payment to all our existing and future subordinated indebtedness;
•Equal in right of payment to all of our present and future unsecured indebtedness that is not
expressly subordinated; and
•Effectively subordinated to all of our subsidiaries’ obligations (including secured and
unsecured obligations) and subordinated in right of payment to our secured obligations, to the
extent of the assets securing such obligations.
As of June 30, 2010, we had no indebtedness senior or equal in right of payment to the
debentures. While the indentures governing the terms and conditions of the debentures
prohibits us from incurring unsecured indebtedness that would be senior in right of payment to
the debentures, it does not preclude us from incurring indebtedness that is collateralized,
regardless of whether ranking senior in right of payment to the debentures and does not
otherwise prohibit or limit the incurrence of additional indebtedness. Because the Corporation
is a corporation without significant assets, other than its equity interest in the Bank, in a
bankruptcy or liquidation proceeding, claims of holders of the debentures may be satisfied
solely from the equity interest in the Bank remaining after satisfaction of all claims of creditors
of the Bank (including depositors).
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Senior Debt (cont.)
Sinking Fund
None.
Covenants
The debentures and related indenture do not contain any financial maintenance or similar
covenants. However, the indenture, among its other provisions, restricts our ability to
grant liens, enter into certain transactions with affiliates, dispose of the Bank or its assets,
pay dividends on, or repurchase our common stock under certain circumstances and incur
non-collateralized indebtedness that ranks senior to the debentures and prohibits us from
consolidating or merging with another entity unless:
•the other entity assumes our obligations under the indenture,
•immediately after the merger or consolidation takes effect, we will not be in default and
no event which, after notice or lapse of time or both, would become a default, under the
indenture, and
•certain other conditions are met including delivery by us to the indenture trustee of an
appropriate opinion of counsel.
Rights of Acceleration
If an event of default has occurred and is continuing, the trustee or the holders of at least
25% in principal amount of the then outstanding debentures may declare the principal
amount of all the debentures, together with accrued but unpaid interest thereon, to be
immediately due and payable, subject in certain circumstances to rescission or waiver by
the holders of at least a majority in principal amount of debentures.
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Senior Debt (cont.)
Use of Proceeds
We intend to utilize up to $XX million of the net proceeds to repay a line of credit with
another financial institution. The unsecured line of credit has an interest rate equal to one
month LIBOR plus 2.0% and matures October 1, 2010. At June 30, 2010 the interest rate
was X.XX%. We intend to utilize any remaining net proceeds for general corporate
purposes, which may include future acquisitions as well as investments in or extensions of
credit to the Bank and our other existing or future subsidiaries.
Common Stock
Outstanding
At June 30, 2010, there were XX shares of Your Corporation common stock issued and
outstanding and YY shares of our preferred stock issued and outstanding, all of which
consisted of our Series A Preferred Stock, which we issued, along with a ten-year warrant to
purchase shares of our common stock, to Treasury pursuant to Treasury’s Troubled Asset
Relief Program Capital Purchase Program. In addition, an aggregate of 100,000 shares of
common stock were issuable upon exercise of outstanding stock options at June 30, 2010,
none of which had an exercise price less than the market price of the common stock as of
that date.
Listing
It is not our intention to list the debentures on any securities exchange.
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Conversion Rights
The debentures will be convertible into the common stock of Your Corporation
at any time up to and including the maturity date (subject to prior redemption by Your
Corporation on not less than 30 nor more than 60 days’ notice) at the principal amount
thereof, at the initial conversion price (subject to adjustments as described below). The
conversion price will be subject to adjustment upon the occurrence of certain events,
including:
• dividends (and other distributions) payable in common stock on any class of capital
stock of Your Corporation;
• the issuance to all holders of common stock of rights, warrants or options entitling
them to subscribe for or purchase stock at less than the current price (determined as
provided in the indenture);
• subdivisions, combinations and reclassifications of common stock;
• distributions to all holders of common stock of evidences of indebtedness or assets
(including securities, but excluding those dividends, rights, warrants, options and
distributions referred to above and dividends and distributions paid exclusively in
cash) of Your Corporation;
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Conversion Rights (cont.)
• distribution consisting exclusively of cash in an aggregate amount within the
preceding 12 months exceeds 10% of Your Corporation’s market capitalization (being
the product of the current market price of the common stock on the date for the
determination of holders of shares of common stock entitled to receive such
distribution times the number of shares of common stock then outstanding); and
• the purchase of common stock pursuant to a tender offer which involves an
aggregate consideration that exceeds 10% of Your Corporation’s market
capitalization on the expiration of such tender offer.
• In case of certain consolidations or mergers to which Your Corporation is a party or
the transfer of substantially all of the assets of Your Corporation, each debenture
then outstanding would, without the consent of any holders of debentures, become
convertible only into the kind and amount of securities, cash and other property
receivable by common stock holders, as if the debenture converted.
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Fundamental Change Permits Holders to Require
Us to Repurchase Debentures
If a fundamental change occurs, you will have the right, at your option, to require
us to pay (the “fundamental change repurchase price”) 101% of the principal amount of
the debentures to be repurchased plus accrued and unpaid interest, to but excluding
the fundamental change repurchase date (unless the fundamental change repurchase
date is between a regular record date and the interest payment date to which it relates,
in which case we will pay accrued and unpaid interest to the holder of record on such
regular record date).
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Fundamental Change Permits Holders to Require
Us to Repurchase Debentures (cont.)
A “fundamental change” will be deemed to have occurred if any of the following occurs
after the earlier of (i) December 19, 2012 and (ii) the date on which all of the shares of TARP
Preferred Stock have been redeemed by us or transferred by Treasury to third parties:
•
•
•
•
a “person” or “group” has become the direct or indirect “beneficial owner,” of more than
50% of the voting power of our common equity;
consummation of (A) any recapitalization, reclassification or change of our common
stock (other than changes resulting from a subdivision or combination) as a result of
which our common stock will be converted into, or exchanged for, stock, other securities,
other property or assets or (B) any share exchange, consolidation or merger of us
pursuant to which our common stock will be converted into cash, securities or other
property or any sale, lease or other transfer in one transaction or a series of transactions
of all or substantially all of the consolidated assets of us and our subsidiaries, taken as a
whole, to any person other than one of our subsidiaries; provided, however, that a share
exchange, consolidation or merger transaction where the holders of more than 50% of all
classes of our common equity immediately prior to such transaction own, directly or
indirectly, more than 50% of all classes of common equity of the continuing or surviving
corporation or transferee of the parent thereof immediately after such event will not
constitute a fundamental change or if common stockholders receive publicly traded
securities;
continuing directors cease to constitute at least a majority of our board of directors (or, if
applicable, a successor person to us); or
our shareholders approve any plan or proposal for the liquidation or dissolution of us.
32
32
Ranking
The debentures will be senior unsecured obligations of Your
Corporation. The debentures will rank:
• senior in right of payment to all our existing and future unsecured
indebtedness if the appropriate instruments defining such indebtedness
provide that such indebtedness is subordinate in right of payment to the
debentures, including our $X.X million of floating rate junior subordinated
deferrable interest debentures due 2036;
• equal in right of payment to all of our present and future unsecured
indebtedness that is not expressly subordinated; and
• effectively subordinated to all of our subsidiaries’ obligations (including
secured and unsecured obligation) and subordinated in right of payment to
our secured obligations, to the extent of the assets securing each
obligations.
• Your Corporation may from time to time incur additional indebtedness
constituting senior indebtedness. While the indenture prohibits us from
incurring unsecured indebtedness that would be senior in right of payment
to the debentures, it does not otherwise prohibit or limit the incurrence of
additional indebtedness or indebtedness which is collateralized. We may
incur substantial additional amounts of indebtedness in the future.
33
33
Optional Redemption
The debentures are redeemable at Your Corporation’s option,
subject to obtaining any required approval from the government agency
having primary regulatory authority over Your Corporation. In whole or from
time to time in part, upon not less than 30 nor more than 60 days’ notice on
any date on or after December 1, 2020. Prior to maturity at a redemption
price equal to 100% of the principal amount, together in the case of any such
redemption with accrued interest to the redemption date (subject to the right
of holders of record on the relevant regular record date to receive interest
due on an interest payment date that is on or prior to the redemption date).
34
34
Limitations on Dividends, Redemptions, Etc.
Upon a Default
The indenture provides that Your Corporation will not:
 declare or pay any dividend or make any other distribution on any junior
securities, except dividends or distributions payable in junior securities; or
 purchase, redeem or otherwise acquire or retire for value any junior
securities, except junior securities acquired upon conversion thereof into
other junior securities; or
 permit a subsidiary to purchase, redeem or otherwise acquire or retire for
value any junior securities;
if, at the time such dividend, distribution, purchase, redemption or other
acquisition is effected, a default in the payment of any interest upon any
debenture when it becomes due and payable or a default in the payment of
the principal of (or premium, if any, on) any debenture at its maturity shall
have occurred and be continuing.
35
35
Limitations on Dividends, Redemptions, Etc.
Upon a Default (cont.)
The term “junior securities” means:
 shares of common stock of Your Corporation;
 shares of preferred stock of Your Corporation;
 shares of any other class or classes of capital stock of Your Corporation;
 any other non-debt securities of Your Corporation (whether or not such other
securities are convertible into junior securities); or
 unsecured debt securities of Your Corporation (other than the debentures) as
to which, in the instrument creating or evidencing the same or pursuant to
which the same is outstanding, it is provided that such debt securities do not
rank equal in right of payment with the debentures.
36
36
Restrictions on Issuance and Sale of Capital Stock or
Dispositions of the Bank




The indenture provides that Your Corporation shall not:
Sell, transfer or otherwise dispose of any shares of the capital stock of the
Bank or permit the Bank to issue, sell or otherwise dispose of shares of its
capital stock, unless the Bank remains a wholly-owned subsidiary of Your
Corporation,
Permit the Bank to merge or consolidate with any other entity (other than
Your Corporation), unless the surviving entity is the Bank or a wholly
owned subsidiary of Your Corporation,
Permit the Bank to convey or transfer its properties and assets
substantially as an entirety to any person, except to Your Corporation or
any wholly owned subsidiary of Your Corporation, or
Permit the Bank from issuing any of its capital stock, preferred or
otherwise, which has a priority or preference senior to any capital stock of
the Bank held by Your Corporation.
37
37
Events of Default
The indenture defines an event of default with respect to the debentures as
any one of the following events:
 certain events of bankruptcy of Your Corporation or receivership of any
major depository institution subsidiary (as defined in the Indenture);
 default for 30 days in payment of interest on any debenture
 default in payment of principal of (or premium, if any, on) or the
fundamental change repurchase price on any debenture when the same
shall become due and payable, whether at stated maturity, by
acceleration or otherwise;
 failure by Your Corporation for 60 days after due notice to remedy a
default in performance or the breach of any material representation,
covenant or warranty in the indenture;
38
38
Events of Default (cont.)
 failure by Your Corporation or any subsidiary to pay indebtedness for money
borrowed in an aggregate principal amount exceeding $X.X million when due or
upon the expiration of any applicable period of grace with respect to such principal
amount; or acceleration of the maturity of any indebtedness of Your Corporation
or any subsidiary for borrowed money in excess of $X.X million if such failure to
pay or acceleration results from a default under the instrument giving rise to, or
securing, such indebtedness and is not annulled within 10 days after due notice
has been given, unless the validity of such default is contested by Your
Corporation in good faith by appropriate proceedings;
 the failure of the Bank to meet criteria required for classification as an “adequately
capitalized” insured depository institution under the regulations of the FDIC if such
failure is not cured within a period of 90 days from the date of such failure or, if
such failure is the result of a change in statute or regulation, such failure is not
cured within a period of 180 days from the date of such failure; or
 at such time as the Bank becomes subject to statutory or regulatory prohibition
against the payment of dividends or other capital distributions and such prohibition
is not removed or otherwise made inapplicable within a period of 90 days from the
date on which such limitation became effective.
39
39
Events of Default (cont.)
 The indenture provides that the trustee will give to the holders of the outstanding
debentures notice within 90 days after the occurrence of any event of default (or any
event which is, or after notice or lapse of time or both would become, an event of
default) known to it if uncured or not waived; provided, that such notice shall not be
given until at least 60 days after the occurrence of an event of default (or any even
which is, or after lapse of time or both would become an event of default) in the
performance or breach of any material representation, warranty or covenant in the
indenture.
 If any event of default occurs and is continuing, either the Trustee or the holders of not
less than 25% in principal amount of the outstanding debentures may declare the
principal amount of all debentures to be due and payable immediately, but upon certain
conditions such declaration may be rescinded and annulled and past defaults may be
waived by the holders of a majority in principal amount of the outstanding debentures
on behalf of the holders of all debentures.
40
40
Events of Default (cont.)
 The indenture provides that the holders of a majority in principal amount of the
outstanding debentures may direct the time, method and place of conducting any
proceeding for any remedy available to the trustee, or exercising any trust or other
power conferred on the trustee, provided that the trustee may decline to act if such
direction is contrary to law or the indenture and may take other action deemed proper
that is not inconsistent with such direction.
 The indenture includes a covenant that Your Corporation will file annually with the
trustee a certificate of no default, or specifying any default that exists.
41
41
Consolidation, Merger and Sales of Assets
Your Corporation, without the consent of the holders of any of the debentures
under the indenture, may consolidate with or merge into any other person or convey,
transfer or lease its properties and assets substantially as an entirety to any person,
provided that:
 the successor is a person organized and validly existing under the laws of any domestic
jurisdiction;
 the successor person, if other than Your Corporation, assumes Your Corporation’s
obligations with respect to the debentures and under the indenture,
 after giving effect to the transaction, no event of default, and no event which, after notice or
lapse of time or both would become an event, shall have occurred and be continuing; and
 certain other conditions are met, including delivery by us to the indenture trustee of an
appropriate opinion of counsel.
Although these types of transactions are permitted under the indenture, certain of the
foregoing transactions could constitute a fundamental change (as defined above) permitting
each holder to require us to repurchase the debentures of such holder as described above.
42
42
Limitation on Suits
No holder on any debenture shall have the right to institute any proceeding,
judicial or otherwise, with respect to the indenture, or for the appointment of a receiver or
trustee, or for any other remedy under the indenture, unless:
• the holder has previously given written notice to the trustee of a continuing event of
default;
• the holders of not less than 25% in principal amount of the outstanding debentures shall
have made written request to the trustee to institute proceedings in respect of such event
of default;
• the holder(s) shall have offered to the trustee reasonable indemnity against the costs,
expenses and liabilities to be incurred in compliance with such request;
• the trustee for 60 days after its receipt of such notice, request and offer of indemnity has
failed to institute any such proceeding; and
• no direction inconsistent with such written request has been given to the trustee during
such 60-day period by the holders of a majority in principal amount of the outstanding
debentures.
43
43
Limitation on Transactions with Affiliates
Your Corporation and its subsidiaries will not directly or indirectly enter into any
transaction or series of related transactions with any affiliate of Your Corporation (other
than Your Corporation or any wholly-owned subsidiary) unless:
• the transaction or series of related transactions is in writing and on terms that are no
less favorable to Your Corporation or the subsidiary, as the case may be, than would be
available in a comparable transaction in an arm’s-length on terms that in good faith
would be offered to a person that is not an affiliate.
• in the case of aggregate payments in excess of $1,500,000, Your Corporation must also
deliver an officers’ certificate to the trustee certifying that the transaction or series of
related transactions complies with the preceding paragraph and the transaction or
series of related transactions has been approved by a majority of the disinterested
directors of Your Corporation.
44
44
Limitation on Transactions with Affiliates (cont.)
Where aggregate payments are in excess of $2,500,000 or, in the event no
members of the board of directors of Your Corporation are disinterested directors with
respect to any transaction or series of transactions involving aggregate payments in excess
of $1,500,000 then:
• in the case of a transaction involving real property, the aggregate rental or sale price of
such real property shall be the fair market rental or sale value of such real property as
determined by a written opinion from a certified expert with experience in appraising the
terms and conditions of the type of transaction or series of transactions for which
approval is required; and
• in all other cases, Your Corporation delivers to the trustee a written opinion of a certified
expert with experience in appraising the terms and conditions of the type of transaction
or series of transactions to the effect that the transaction or series of transactions are
fair to Your Corporation or such subsidiary from a financial point of view.
An affiliate of Your Corporation generally includes any executive officer, director
or 10% stockholder of Your Corporation or the Bank.
45
45
Additional Covenants
The indenture contains a number of additional covenants and other provisions
relating to the Corporation and its operations, including the following:
Corporate Existence of the Corporation and its Subsidiaries.
• keep in full force and effect the corporate existence, rights (charter and statutory) and
franchises of Your Corporation and its subsidiaries;
• keep in full force and effect the Bank’s status as a wholly owned subsidiary and an
insured depository institution and do all things necessary to ensure that deposit accounts
of the Bank are insured by the FDIC (or any successor organization) up to the maximum
amount permitted by the Federal Deposit Insurance Act and regulations thereunder (or by
any succeeding Federal law hereafter enacted).
Maintenance of Insurance.
• Your Corporation and its subsidiaries at all times maintain insurance on all of the
properties against loss or damage from hazards and risks to the person, rights and
property of others.
Limitations on Liens on Bank Stock.
• Your Corporation shall not create, assume, incur or suffer to exist any mortgage, pledge,
encumbrance, lien or charge of any kind upon the capital stock of the Bank, including as
security or collateral for indebtedness, or borrowed money or otherwise.
46
46
Additional Covenants (cont.)
Books and Records.
• Your Corporation and each subsidiary is required to, at all times, keep proper books of
record and accounts in which proper entries shall be made in accordance with generally
accepted accounting principles and, to the extent applicable, regulatory accounting.
Maintenance of Office or Agency.
• Your Corporation will maintain an office or agency in each place of payment where
debentures may be presented or surrendered for payment, where debentures may be
surrendered for transfer or exchange and where notices and demands to or upon Your
Corporation in respect of the debentures and this indenture may be served.
Limitation on Indebtedness Senior to Debentures.
• Your Corporation shall not incur any indebtedness which would be senior in right of
payment to the debentures; provided, however, this limitation shall not affect Your
Corporation’s ability to incur indebtedness which is collateralized.
47
47
Additional Covenants (cont.)
Payment of Taxes and Other Claims.
• Your Corporation will pay or discharge or cause to be paid or discharged, before the
same become delinquent, (1) all taxes, assessments and governmental charges levied or
imposes upon it or upon its income, profits or property and (2) all lawful claims for labor
materials and supplies which, if unpaid, might by law become a lien upon its property;
provided, however, that Your Corporation shall not be required to pay or discharge or
cause to be paid or discharged any such tax, assessment, charge or claim whose
amount, applicability of validity is being contested in good faith by appropriate
proceedings or any such tax assessment, charge or claim is not disadvantageous in any
material respect to the holders of the debentures.
Notice of Events of Default or Default.
• Your Corporation will be required to provide the trustee prompt written notice of any event
of default or any event that upon notice or the passage of time or both would become an
event of default of which the Company has actual knowledge.
48
48
Modification and Waiver





Modifications and amendments of the indenture may be made by Your Corporation
and the trustee with the consent of the holders of not less than 66-2/3% in principal amount
of the outstanding debentures; provided, however, that no such modification or amendment
may, without the consent of the holder of each outstanding debenture affected thereby:
change the stated maturity of the principal of, or time of payment on any installment of
interest on, and debenture;
reduce the principal amount of, or interest on, any debenture;
change the currency of payment of principal of, or rate of interest on, any debenture;
impair the right to institute suit for the enforcement of any payment on or with respect to any
debenture;
adversely affect the right to convert debentures;
49
49
Modification and Waiver (cont.)
 reduce the fundamental change repurchase price of any debenture or amend or modify in
any manner adverse to the holders of debentures our obligations to make such payment,
whether through an amendment or waiver of provisions in the indenture (including the
definitions contained therein) or otherwise;
 change the ranking of the debentures in a manner adverse to the holders of the debentures;
 reduce the above-state percentage of outstanding debentures necessary to modify or amend
the indenture; or
 reduce the percentage of aggregate principal amount of outstanding debentures necessary
for waiver of compliance with certain provisions of the indenture or for waiver of certain
defaults.
50
50
Modification and Waiver (cont.)
The holders of not less than a majority in principal amount of the outstanding
debentures may on behalf of the holders of all of the debentures waive any past default
under the indenture, except a default in the payment of principal of (or premium, if any) or
interest on any debenture or in respect of a covenant or provision which cannot be modified
without the consent of each holder of debentures affected.
Without the consent of any holder, we and the trustee may amend the indenture to:
 cure any ambiguity or correct any omission, defect or inconsistency in the indenture, so long
as such action will not materially and adversely affect the interests of holders of the
debentures; provided that any such amendment made solely to conform the provisions of the
indenture to this prospectus supplement will be deemed not to adversely affect the interests
of holders of the debentures;
 provide for the assumption by a successor corporation, partnership, trust or limited liability
company of our obligations under the indenture;
51
51
Modification and Waiver (cont.)
 add a guarantee with respect to the debentures;
 secure the debentures;
 add to out covenants for the benefit of the holders or surrender any right or power conferred
upon us;
 make any change that does not materially adversely affect the rights of any holder; or
 comply with any requirement in connection with the qualification of the indenture under the
Trust Indenture Act.
52
52
Silver, Freedman & Taff, L.L.P.
Who We Are
Washington, D.C. based law firm specializing in financial institutions:
•
•
•
•
•
•
•
•
•
•
•
Mergers and Acquisitions
Regulatory and Enforcement Matters
Debt and Equity Securities Offerings
Recapitalizations
Compensation and Employee Benefit Matters
Securitizations
Credit Union to Thrift Conversions
Mutual to Stock Conversions
Charter Conversions
Holding Company and MHC Formations/Reorganizations
Bank and Thrift De Novo Formations
Silver, Freedman & Taff, L.L.P.
53
Questions?
54
54
Appendix A
State Non-Member Bank
TOTAL CAPITAL
Consists of Tier 1 and Tier 2.
At least 50% of Total Capital must be Tier 1.
TIER 1
Voting common stock must be the dominant form of Tier 1.
Common stock
All qualifies
Noncumulative
Perpetual Preferred
Stock
Cumulative Perpetual
Preferred Stock
Bank Holding Company
All qualifies if:
All qualifies if:
1.Maturity: No stated term.
2.Redemption:
a. Never at option of holder.
b. No term or provision requiring future redemption.
c. No required or potential dividend increase that would
effectively require redemption.
d. Cannot be redeemable by Bank during first five
years, unless approved by FDIC at time of issuance
or redemption.
3.Dividends:
a. Payment must be waivable with no right of
accumulation or other contingent claim on the Bank.
b. Rate may not be periodically reset based on credit
standing (such as with auction rate, money market or
remarketable preferred).
Maturity: No stated term.
1.Redemption:
a. Never at option of holder.
b. No term or provision requiring future redemption.
c. No required or potential dividend increase that would effectively
require redemption.
d. At option of Company only with Federal Reserve approval.
2.Dividends:
a. Payment may be deferred or eliminated with no right of
accumulation or other contingent claim on the Bank.
b. Rate may not be periodically reset based on credit standing (such
as with auction rate, money market or remarketable preferred).
3.Equity Status: Can absorb losses of Company as a going concern.
Does not qualify.
(Cumulative
Perpetual Preferred
plus Trust Preferred
are limited to 25% of
overall Tier 1 or onethird of the other
elements of Tier 1.)
Silver, Freedman & Taff, L.L.P.
All qualifies if:
1.Maturity: No stated term.
2.Redemption:
a. Never at option of holder.
b. No term or provision requiring future redemption.
c. No required or potential dividend increase that would effectively
require redemption.
d. At option of Company only with Federal Reserve approval.
3.Dividends: Payment may be deferred or eliminated. (Accumulation is
permitted).
4.Equity Status: Can absorb losses of Company as a going concern.
55
TIER 2
Cumulative Perpetual
Preferred Stock
(For Holding Company,
includes Trust Preferred
that does not qualify for
Tier 1)
All qualifies if:
1.Maturity: No stated term.
2.Redemption:
a. At option of holder with FDIC approval.
b. No term or provision requiring future redemption.
c. No required or potential dividend increase that
would effectively require redemption.
d. Cannot be redeemable by Bank during first five
years, unless approved by FDIC at time of
issuance or redemption.
3.Dividends: Must allow deferred payments.
(Accumulation is permitted).
4.Equity Status: Can absorb losses of Bank as a going
concern.
Silver, Freedman & Taff, L.L.P.
All qualifies if:
1.
Maturity: No stated term.
2.
Redemption:
a.
Never at option of holder.
b.
No term or provision requiring future redemption.
c.
No required or potential dividend increase that
would effectively require redemption.
d.
At option of Company only with Federal Reserve
approval.
3.
Dividends: Payment may be deferred or
eliminated. (Accumulation is permitted).
4.
Equity Status: Can absorb losses of Company as
a going concern.
56
TIER 2
Noncumulative Perpetual
Preferred Stock with
Credit Related Dividend
Rate Adjustments
(Including auction rate,
Dutch auction, money
market and remarketable
preferred)
All qualifies if:
1.Maturity: No stated term.
2.Redemption:
a. At option of holder with FDIC approval.
b. No term or provision requiring future redemption.
c. No required or potential dividend increase that
would effectively require redemption.
d. Cannot be redeemable by Bank during first five
years, unless approved by FDIC at time of
issuance or redemption.
3.Dividends: Must allow deferred payments.
(Accumulation is permitted).
4.Equity Status: Can absorb losses of Bank as a going
concern.
Silver, Freedman & Taff, L.L.P.
All qualifies if:
1. Maturity: No stated term.
2. Redemption:
a. Never at option of holder.
b. No term or provision requiring future redemption.
c.
No required or potential dividend increase that
would effectively require redemption.
d. At option of Company only with Federal Reserve
approval.
3. Dividends: Payment may be deferred or eliminated.
(Accumulation is permitted).
4. Equity Status: Can absorb losses of Company as a
going concern.
57
Long-Term Preferred
Stock
1.
2.
3.
4.
5.
Subject to the discount described below over the last
five years of the term, all qualifies if:
Maturity: At least 20 years.
Redemption:
a. At option of holder with FDIC approval.
b. No term or provision requiring future redemption.
c. No required or potential dividend increase that
would effectively require redemption.
d. Cannot be redeemed by Bank during first five
years unless approved by FDIC at issuance or
prior to redemption.
Dividends: Must allow deferred payments.
(Accumulation is permitted).
Equity Status: Can absorb losses of Bank as a going
concern.
Discount: During last five years of the term, the
amount included is reduced by a fifth of the original
amount (less redemptions) each year with nothing
included in regulatory capital during the last year before
maturity.
Silver, Freedman & Taff, L.L.P.
1.
2.
3.
4.
5.
Subject to the discount described below over the
last five years of the term, all qualifies if:
Maturity: At least 20 years.
Redemption:
a. At option of holder, but maturity is adjusted
to the first time the holder can require
redemption.
b. At option of Company only with Federal
Reserve approval.
Dividends: Payment may be deferred or
eliminated. (Accumulation is permitted).
Equity Status: Can absorb losses of Company
as a going concern.
Discount: During last five years of the term, the
amount included is reduced by a fifth of the
original amount (less redemptions) each year
with nothing included in regulatory capital during
the last year before maturity.
58
Intermediate-Term
Preferred Stock
(Intermediate-Term
Preferred Stock plus
Term Subordinated
Debt included in Tier
2 may not exceed
50% of Tier 1.)
1.
2.
3.
4.
5.
Subject to the discount described below over the last
five years of the term, all qualifies if:
Maturity: Original term of at least five years.
Redemption:
a. At option of holder with FDIC approval.
b. No term or provision requiring future redemption.
c. No required or potential dividend increase that
would effectively require redemption.
d. Cannot be redeemed by Bank during first five
years unless approved by FDIC at issuance or
prior to redemption.
Dividends: Must allow deferred payments.
(Accumulation is permitted).
Equity Status: Can absorb losses of Bank as a going
concern.
Discount: During last five years of the term, the amount
included is reduced by a fifth of the original amount
(less redemptions) each year with nothing included the
last year before maturity.
Silver, Freedman & Taff, L.L.P.
1.
2.
3.
4.
5.
Subject to the discount described below over the
last five years of the term, all qualifies if:
Maturity: Original weighted average maturity of
at least five years.
Redemption:
a. At option of holder, but maturity is adjusted
to the first time the holder can require
redemption.
b. At option of Company only with Federal
Reserve approval.
Dividends: Payment may be deferred or
eliminated. (Accumulation is permitted).
Equity Status: Can absorb losses of Company
as a going concern.
Discount: During last five years of the term, the
amount included is reduced by a fifth of the
original amount (less redemptions) each year
with nothing included the last year before
maturity.
59
Mandatory
Convertible
Debt
1.
2.
3.
4.
Subject to the discount described below over the last five
years of the term, if not already converted, all qualifies if:
Maturity: Original term of no more than 12 years.
Security and Subordination: Fully paid, not secured and
subordinate to all claims of depositors and creditors.
Holder must waive any right of set-off, if applicable.
Redemption:
a. At option of holder with FDIC approval.
b. No acceleration except in bankruptcy, insolvency
or reorganization.
c. No term or provision requiring future redemption.
d. Cannot be redeemed by Bank during first five
years unless approved by FDIC at issuance or
prior to redemption.
Payments: Bank must have the option to defer principal
and interest payments, if it reports no net income
combined over the last four quarters and eliminates
cash dividends on common and preferred stock.
Silver, Freedman & Taff, L.L.P.
Subject to the discount described below over the last
five years of the term, if not already converted, all
qualifies if:
1. Maturity: Original term of no more than 12 years
2. Security and Subordination: Fully paid, not secured
and subordinate to all claims of creditors.
3. Redemption:
a. May be redeemed only with the proceeds of a sale of
common or preferred stock. Must state intention to
use proceeds for this purpose during the same
quarter as the sale or lose the right to apply the funds
for this purpose.
b. At option of holder with Federal Reserve approval.
c. No acceleration except in bankruptcy, insolvency or
reorganization.
d. At option of Company only with Federal Reserve
approval.
e. No repurchases allowed.
60
Mandatory
Convertible
Debt (cont.)
5. Equity Status: Can absorb losses of Bank as a going
concern because it is convertible to common or
preferred stock when the Bank has negative unimpaired
capital and surplus.
6. Conversion: Bank must be required to convert the debt
to common or preferred stock by a set date or before the
maturity of the debt.
7. Disclosure:
a. Contains a boldface legend on its face that the
obligation is not a deposit and is not insured by the
FDIC.
b. Must expressly state that it is subordinate and junior to
claims of depositors and creditors.
c. Must expressly state that it is not eligible as collateral for
a loan from the Bank and may not be retired without
FDIC approval.
8. Discount: During last five years, the amount included is
reduced by a fifth of the original amount (less
redemptions) each year with nothing included the last
year before maturity.
Silver, Freedman & Taff, L.L.P.
4. Payments: Company must have the option to defer
interest payments, if it reports no net income
combined over the last four quarters and eliminates
cash dividends on common and preferred stock.
5. Equity Status: Can absorb losses of Company as a
going concern, because it is convertible to common
or preferred stock when the Company has negative
retained earnings and surplus.
6. Conversion: Company must be required to convert
the debt to common or preferred stock by a set date
or before the maturity of the debt.
7. Credit Sensitivity: Payment may not be tied to
financial condition of Company, including auction
rate. Rate may not increase with late payment.
8. Safety and Soundness: May not impose limits on
Company that are too restrictive, particularly as
financial condition is impaired. Includes limits on
asset sales, changes in control or that otherwise limit
the ability to raise capital. Limits cannot restrict
liquidity or management flexibility
9. Discount: During last five years, the amount included
is reduced by a fifth of the original amount (less
redemptions) each year with nothing included the last
year before maturity.
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Other Hybrid
(Debt/Equity)
Capital
Instruments
1.
2.
3.
4.
5.
Subject to the discount described below over the last five
years of the term, if any, if not already converted, all
qualifies if:
Security and Subordination: Fully paid, not secured and
subordinate to all claims of depositors and creditors.
Holder must waive any right of set-off, if applicable.
Redemption:
a. At option of holder with FDIC approval.
b. No term or provision requiring future redemption.
c. No acceleration except in bankruptcy, insolvency or
reorganization.
d. Cannot be redeemed by Bank during first five years
unless approved by FDIC at issuance or prior to
redemption.
Payments: Bank must have the option to defer principal
and interest, if it reports no net income combined over the
last four quarters and eliminates cash dividends on
common and preferred stock.
Equity Status: Can absorb losses of Bank as a going
concern because it is convertible to common or preferred
stock when the Bank has negative unimpaired capital and
surplus.
Discount: During last five years of the term, the amount
included is reduced by a fifth of the original amount (less
redemptions) each year with nothing included the last year
before maturity.
Silver, Freedman & Taff, L.L.P.
Subject to the discount described below over the
last five years of the term, if any, if not already
converted, all qualifies if:
1. Security and Subordination: Fully paid, not
secured and subordinate to all claims of
creditors.
2. Redemption:
a. At option of holder with Federal Reserve approval.
b. No acceleration except in bankruptcy, insolvency
or reorganization.
c. At option of Company only with Federal Reserve
approval.
3. Payments: Company must have the option to
defer interest payments, if it reports no net
income combined over the last four quarters and
eliminates cash dividends on common and
preferred stock.
4. Equity Status: Can absorb losses of Company
as a going concern, because it is convertible to
common or preferred stock when the Company
has negative retained earnings and surplus.
5. Conversion: Company must be required to
convert the debt to common or preferred stock
by a set date or before the maturity of the debt.
6. Discount: During last five years, the amount
included is reduced by a fifth of the original
amount (less redemptions) each year with
nothing included the last year before maturity.
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Perpetual Debt
Does not qualify.
Silver, Freedman & Taff, L.L.P.
Subject to the discount described below over the last five years of the
term, if not already converted, all qualifies if:
1.Maturity: Original term of no more than 12 years
2.Security: Not secured.
3.Redemption:
a. At option of holder with Federal Reserve approval.
b. No acceleration except in bankruptcy, insolvency or
reorganization.
c. At option of Company only with the proceeds of a sale of
common or preferred stock or with Federal Reserve approval.
4.Payments:
a. Company must have the option to defer interest payments, if it
eliminates cash dividends on common and preferred stock.
b. Nonpayment of interest may not trigger repayment of principal of
this or any other obligation of the Company and may not be deemed
prima facie bankruptcy.
5.Equity Status: Can absorb losses of Company as a going concern,
because it is convertible to common or preferred stock when the
Company has negative retained earnings and surplus.
6.Conversion: Company must be required to convert the debt to
common or preferred stock when the Company’s retained earnings
and surplus are negative.
7.Credit Sensitivity: Payment may not be tied to financial condition of
Company, including auction rate. Rate may not increase with late
payment.
8.Safety and Soundness: May not impose limits on Company that are
too restrictive, particularly as financial condition is impaired. Includes
limits on asset sales, changes in control or that otherwise limit the
ability to raise capital. Limits cannot restrict liquidity or management
flexibility
9.Discount: During last five years, the amount included is reduced by
a fifth of the original amount (less redemptions) each year with
nothing included the last year before maturity.
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Term Subordinated
Debt
(Intermediate-Term
Preferred Stock plus
Term Subordinated
Debt included in Tier 2
may not exceed 50% of
Tier 1.)
Subject to the discount described below over the
last five years of the term, all qualifies if:
1. Maturity: Original term of at least five years or, if
there are principal payments during the term, an
average maturity of at least five year, unless a
shorter average maturity is approved by the FDIC.
2. Security: Not secured.
3. Redemption:
a. At option of holder with FDIC approval.
b. No term or provision requiring future redemption.
c. Cannot be redeemed by Bank during first five years
unless approved by FDIC at issuance or prior to
redemption.
4. Disclosure:
a. Contains a boldface legend on its face that the
obligation is not a deposit and is not insured by the
FDIC.
b. Must expressly state that it is subordinate and
junior to claims of depositors and creditors.
c. Must expressly state that it is not eligible as
collateral for a loan from the Bank and may not be
retired without FDIC approval.
5. Discount: During last five years of the term, the
amount included is reduced by a fifth of the original
amount (less redemptions) each year with nothing
included the last year before maturity.
Silver, Freedman & Taff, L.L.P.
1.
2.
3.
a.
b.
c.
4.
5.
6.
7.
Subject to the discount described below over the
last five years of the term, all qualifies if:
Maturity: Original weighted average maturity of at
least five years.
Security and Subordination: Not secured and no
sinking fund for payment. Subordinate to all claims
of creditors.
Redemption:
At option of holder, but maturity is adjusted to the
first time the holder can require redemption.
No acceleration except in bankruptcy, insolvency or
reorganization.
At option of Company only with Federal Reserve
approval.
Disclosure: Must expressly state that the obligation
is not a deposit and is not federally insured.
Credit Sensitivity: Payment may not be tied to
financial condition of Company, including auction
rate. Rate may not increase with late payment.
Safety and Soundness: May not impose limits on
Company that are too restrictive, particularly as
financial condition is impaired. Includes limits on
asset sales, changes in control or that otherwise
limit the ability to raise capital. Limits cannot
restrict liquidity or management flexibility.
Discount: During last five years of the term, the
amount included is reduced by a fifth of the original
amount (less redemptions) each year with nothing
included the last year before maturity.
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