July 27, 2021

Volume XI, Number 208

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July 27, 2021

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July 26, 2021

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Preferred Stock Purchase Program by Treasury Department May Be an Opportunity for Financial Institutions

A program adopted by Congress at the end of 2020, which has attracted little press coverage, could provide great benefit to qualified community financial institutions. The Consolidated Appropriations Act, 2021 (Act), effective December 27, 2020, establishes an Emergency Capital Investment Fund (ECIF) modeled loosely on the Community Development Capital Initiative (CDCI) and Small Business Lending Fund (SBLF) programs of the Troubled Asset Relief Program (TARP) era.

The Act establishes an aggregate amount of $9 billion for Treasury Department investment in preferred stock, or debentures if a subchapter S corporation, of community financial institutions.

Eligibility: At time of application, an applicant shall provide the Treasury Department with an investment lending plan demonstrating that not less than 30% of the lending of an applicant over the past two fiscal years was made directly to low- and moderate-income borrowers, to borrowers that create direct benefits for low- and moderate-income populations, or to other targeted populations as defined by the ECIF. Existing Community Development Financial Institutions should be meeting these obligations already. Institutions designated as being in a Troubled Condition or subject to a formal enforcement order for safety and soundness are not eligible to participate.

Term and Dividend Rate: The dividend rate is set at 2% for the first 10 years, with a downward adjustment, if the amount of lending by the institution within the minority, rural, and urban low-income and underserved communities to low- and moderate-income borrowers increases. If lending in such areas increases in an amount between 200% and 400% of the capital investment, the annual payment rate drops to 1.25%. If such lending is increased by more than 400% of the capital investment, the dividend rate drops to .5% per annum. It is unclear at present whether these are annual measurements, and the metrics of measurement are yet to be developed. No dividends are due within the first 24-month period, and dividends may be deferred if an applicant encounters a failure to meet Tier 1 Capital Ratios. If the investment is not repaid to the Treasury Department at the end of 10 years, it is likely to have a punitive interest rate.

Amount Available: The amount of preferred stock (or debentures for sub S corporations) that may be issued by a community financial institution is not more than 7.5% of total assets for institutions with assets more than $2 billion, 15% of total assets for institutions with assets between $500 million and $2 billion, and 22.5% of total assets for institutions with less than $500 million of assets, provided no investment by the Treasury Department can exceed $250 million. There is a $4 billion set-aside for institutions with less than $2 billion in assets.

Exit Strategy: Unlike the prior programs, the secretary of the Treasury is required to give a right of first refusal to the issuer to buy back the instrument before sale to a third party and shall not sell more than 25% of the interest to any one purchaser.

Grants: In addition to the proposed investment in preferred stock or debentures, $3 billion is appropriated for grants to community financial institutions to expand lending, grant making, or investment activity in low- to moderate-income minority communities and to minorities who have significant unmet capital financial services needs, as well as financial assistance, technical assistance, awards training, and outreach programs. No information has come out on such programs yet.

Capital Treatment: The legislation provides that the Treasury Department shall seek to establish that the preferred stock shall receive Tier 1 capital treatment.

Sunset of Program: Program eligibility will terminate six months after the National Emergency Declaration by the President on March 13, 2020, terminates.

Points of Concern: The Treasury Department is directed to issue rules setting restrictions on dividends, executive compensation, and share repurchases, but has yet to issue such rules. Because of restrictions imposed under the previous CDCI and SBLF programs, there are the following questions:

  1. What are the limitations on executive compensation? Prior rules for the CDCI and SBLF programs limited cash bonuses to certain executive officers.

  2. What are the limitations on dividends paid on common stock? Prior rules for the CDCI and SBLF programs limited dividends per annum to the amount of annual dividend paid in the year prior to participation in the program, and if reduced, set a lower ceiling.

  3. What are the limitations on stock repurchase programs? Prior rules for the CDCI and SBLF programs prohibited any repurchase if preferred dividends were not paid current.

  4. What are the limitations imposed on the 30% lending test eligibility criteria? The legislation includes borrowers “that create direct benefits for low- and moderate-income populations….”

© 2021 Jones Walker LLPNational Law Review, Volume XI, Number 42
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About this Author

Craig N. Landrum, Jones Walker, Banking Industry Lawyer, Insurance Representation Attorney
Partner

Craig Landrum is a partner in the firm's Banking & Financial Services Practice Group and practices from the firm's Jackson office. His practice focuses on bank regulatory law, corporate law, mergers and acquisitions law, and securities law. He also has experience representing insurance companies and agencies with regard to corporate and regulatory matters, including the licensing of bank subsidiaries as general insurance agencies and underwriters.

Mr. Landrum is a graduate of Mississippi State University, where he received a bachelor of...

601.949.4973
Ronald A. Snider Bank Regulatory Law & Corporate Law Jones Walker Mobile, AL
Partner

Ron Snider is a partner in the Corporate Practice Group, where he focuses his practice on bank regulatory law and corporate law. 


From 1973 to 1979, Ron was with the Federal Home Loan Bank Board, first in the Office of the General Counsel, and then as assistant secretary. He also served as assistant secretary of the Federal Home Loan Mortgage Corporation from 1976 to 1979.

In addition to his active involvement in a number of professional associations, Ron is a member, and past chairman, of the board of the Alabama Public Library Service, serves on the Gulf...

251.439.7548
Robert L. Carothers, Jones Walker, Banking Services Lawyer, Financial Regulation Attorney
Partner

Rob Carothers is a partner in the firm's Banking & Financial Services Practice Group. His practice is focused primarily in the area of financial institution regulation. He has experience advising state banks, national banks, thrifts, and their holding companies on a wide range of regulatory matters, including:

  • Affiliate transactions and compliance with Sections 23A and 23B of the Federal Reserve Act and Regulation W and Anti-Tying Rules

  • Applying for CDFI status

  • ...
251.439.7522
Thomas Walker Jr Corporate Attorney Jones Walker Jackson, MS
Partner

Tom Walker is a partner in the Corporate Practice Group. He focuses on commercial and regulatory matters in the financial services industry, with a depth of experience representing financial institutions.


Prior to joining the firm, Tom served as executive vice president and director of a community bank in Forest, Mississippi. His experience as general counsel, chief operating officer, chief financial officer, and chief investments officer in the financial services sector enhances his ability to provide legal services to his clients.

Tom previously served as chairman of...

601-949-4631
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