Privately held and thinly traded banking companies that participate in the Treasury Department's Troubled Asset Relief Program would face tighter restrictions than publicly traded ones, particularly when it comes to paying dividends and redeeming trust-preferred securities.
But when weighed against the alternative of raising capital through private-sector channels at a time when there is little to be had, the Treasury offer appears too good to ignore, bankers and industry observers said.
Chip MacDonald, a partner at the law firm Jones Day, said he spoke with a group of bankers Tuesday afternoon, and the consensus was, "if you need capital, this is the best source."
The Treasury outlined how it will invest in privately held banks after the market closed Monday.
Banking and thrift companies may participate regardless of whether they are registered with the Securities and Exchange Commission, as long as their stock is not traded on a national exchange, so those listed on the bulletin board or pink sheets are eligible. The deadline to apply is Dec. 8.
The Treasury said terms for Subchapter S corporations and mutuals are still in the works.
Much of the term sheet is the same for private banks as for public ones. They may apply for a capital infusion ranging from 1% to 3% of their risk-weighted assets. The government would get preferred shares that pay 5% for the first five years and 9% after that.
One key difference: Instead of taking warrants to purchase common stock, the Treasury would take warrants to purchase additional preferred stock. They would be exercised immediately, would pay a 9% dividend annually, and could not be redeemed until after the Treasury's other preferred shares are redeemed.
The amount of warrant preferred shares issued would be equal to 5% of the initial Treasury investment.
For the publicly traded companies, the Treasury's warrants for common stock have no time frame for exercise or redemption. In addition, the amount of common stock would be equal to 15% of the initial investment.
A key benefit for the nonpublic banks is that there would be no common stock dilution, Mr. MacDonald said, and the 9% dividend would be paid on a relatively small number of shares.
"It's a reasonable accommodation" for the banks, he said. "If they went out and raised capital another way, they'd be paying 9% or more, so this is not unrealistic."
The warrant preferred stock also would count as Tier 1 capital, he said.
Robert Davis, the American Bankers Association's executive vice president for government relations, said the proposal "is a good-faith effort to provide terms that are economically equivalent to what was provided for public companies, but there are some issues to evaluate," including the warrant arrangement.
Another concern "is the fact that there is a longer period of time where government consent is required to make certain management decisions," he said.
Private companies that receive Treasury funds are restricted for 10 years from increasing dividend payments and repurchasing stock or trust-preferred securities without the Treasury's approval. Public companies face just three years of similar restrictions.
Cynthia Blankenship, the chairwoman of the Independent Community Bankers of America and the vice chairwoman of the $250 million-asset Bank of the West, a Grapevine, Tex., unit of Greater Southwest Bancshares Inc., said privately held companies that accept the government terms will need to ramp up lending to make it worth their while.
"The only way you can make the capital pay for itself is to leverage it into loans," she said. "You can't buy Treasuries with it, because you would have a negative spread."
Community banks that do not have a lot of loan demand might shy away from the program, she said. "This isn't free or cheap."
Ms. Blankenship said she spoke to bankers at an S Corp conference in San Antonio last week, and several of the companies were upset that Treasury has been slow to include them.
"They are very frustrated," she said. "There are still 3,000 banks — S Corps and mutuals — that don't have any access" to the funds.
In one addition to the new term sheet, Mr. MacDonald said the Treasury is barring participants and their subsidiaries from making any transaction with "related persons" unless it is approved by a committee of independent board members and the terms are the same as for other customers.
But public companies must abide by such requirements already, he said.
Other observers said they do not consider the new terms onerous.
"I think the rationale for that is, because these are private institutions, the optics of it are that the money is a lot closer to going into an ownership group than it would be in a public company, where ownership is more diffused," said William Weisberg, a partner at the law firm Bryan Cave LLP. "We don't want to be perceived as putting money in Mr. Potter's pocket — you know, Mr. Potter from 'It's a Wonderful Life.' That's what you think of when you think of a privately held bank."
During a conference call Tuesday hosted by Regions Financial Corp.'s Morgan Keegan & Co., some bankers expressed concern with a provision in the term sheet that says the preferred shares are transferable and therefore could end up in the hands of outside investors, who could then exert more control over the companies.
The Treasury could "ask the private markets to monetize those for the taxpayers," said Brian M. Mellone, managing director of Morgan Keegan's financial institutions group. But the Treasury could also "hold it and have it as a earning asset."
The Treasury said it has discretion to exempt institutions from the warrant requirement and intends to do so conservatively. It said the warrants would not be required for any certified community development financial institutions receiving investments of $50 million or less.
Fran Grossman, executive vice president for the $2.3 billion-asset ShoreBank Corp. in Chicago, said not having warrants "was a critical issue" for the institutions, given their narrow focus on underserved low- and moderate-income areas and their ownership structure.
"We are extraordinarily excited," she said. "This is money that is going to allow us to do more in a time when more needs to be done."
ShoreBank is one of roughly 60 community development financial institutions in the country, but Ms. Grossman said that number could increase, since the Treasury is allowing other banks to sidestep warrants if they apply to be certified as one and are approved by Jan. 15.
"There are a great number of small banks that are already doing lending in this area but are not aware of the certification," she said.