Last Friday, May 22, 2009, the Federal Reserve Board announced the adoption of an interim final rule that would allow Subchapter S bank holding companies to treat 100% of subordinated debt issued to Treasury under the TARP Capital Purchase Program (CPP) as Tier 1 capital. However, the rule also states that any CPP funds will also count towards the limit on the amount of other restricted core capital elements that are includable in Tier 1 capital (e.g. qualifying trust preferred securities). For example, if the amount of CPP funds held by a Sub S bank holding company is equal to or exceeds 25% of the company’s Tier 1 capital, the company may not include any other restricted core capital elements in Tier 1 capital; such other restricted core capital elements could only be included as Tier 2 capital.

The interim final rule also amends the Federal Reserve’s Small Bank Holding Company Policy Statement (Policy Statement) to exclude CPP funds from debt for purposes of the debt-to-equity standard outlined in the Policy Statement. The Policy Statement currently provides that small bank holding companies (bank holding companies with less than $500 million in consolidated assets) may exclude from debt an amount of subordinated debt associated with trust preferred securities up to 25% of the company’s equity less goodwill. The rule will allow small bank holding companies to receive CPP funds without burdening their debt-to-equity ratio standard, which, if exceeded could restrict the payment of dividends.

Recall that Secretary Geithner recently announced that the TARP Capital Purchase Program will be extended for “small community banks,” which, for purposes of this program is defined as institutions with less than $500 million in assets (or less than $500 million in consolidated assets for bank holding companies). The application period under the “CPP for Small Banks,” as it has been dubbed by Treasury, will remain open until November 21, 2009. Qualifying institutions may apply for up to 5% of their total risk weighted assets. The terms of the CPP for Small Banks are substantially similar to those of the original programs, except that the warrant provisions will only apply to the first 3% of Treasury’s CPP investment. Banks considering participating should review the FAQs posted on the Treasury Department’s website at the following link:

http://www.financialstability.gov/docs/CPP/FAQonCPPforsmallbanks.pdf

Institutions with more than $500 million in assets that have already applied and received preliminary approval from Treasury should contact their closing attorneys to determine when their new closing deadline will be. Officials at Treasury have informed us that they will be communicating guidance on new closing deadlines to the closing attorneys very soon.