Alert April 21, 2009

Treasury Releases Capital Purchase Program Term Sheets for Mutual Banks and Savings Association

Following up on the Capital Purchase Program (“CPP”) terms for mutual holding companies, the Treasury released CPP terms for mutual banks and savings associations.  For a discussion of the terms for mutual holding companies, please see the April 14, 2009 Alert.  Under this term sheet, mutual banks and savings associations that are not controlled by a bank holding company or savings and loan holding company may sell subordinated debentures (“Senior Securities”) to the Treasury.  The aggregate principal amount of the Senior Securities must be between 1% and 3% of the risk-weighted assets of the issuing mutual bank or savings association but in no event may exceed $25 billion.  The Senior Securities are senior to mutual capital certificates and other capital instruments authorized by state law, but must be subordinated to claims of depositors and to the mutual institution’s other senior indebtedness, unless such senior indebtedness is expressly made pari passu or subordinated to the Senior Securities.  Significantly, unlike the CPP instruments for other forms of banking organizations, the Senior Securities qualify as Tier 2 capital rather than Tier 1 capital.  The Senior Securities have a maturity of 30 years and are freely transferable.  The Senior Securities have no voting rights other than class voting rights on the issuance of equity securities or other capital instruments which purport to rank senior to the Senior Securities, any amendment to the rights of the Senior Securities and any merger or similar transaction.

The annual interest rate on the Senior Securities will be 7.7% for five years and after the fifth anniversary the annual interest rate will increase to 13.8%.  If interest is not paid for six quarters, whether or not consecutive, holders of Senior Securities have the right to elect two directors.  Mutual banks and savings associations participating in the CPP are subject to certain restrictions on the payment of dividends, including extraordinary dividends on deposit accounts, and the repurchase and redemption of equity securities, capital certificates, or other capital instruments.  Many of these dividend and repurchase restrictions do not apply if the Treasury has transferred the Senior Securities to a third party.  After ten years, participating mutual banks and savings associations may not pay any dividends or redeem or repurchase any equity securities, capital certificates, or other capital instrument until the Senior Securities are fully redeemed.

The Treasury also will receive warrants to purchase additional Senior Securities (“Warrant Securities”) in an amount equal to 5% of the Senior Securities purchased on the date of the investment, subject to certain reductions.  The Treasury intends to immediately exercise the warrants.  The Warrant Securities have the same rights and terms as the Senior Securities, except that the annual interest rate is always 13.8% and the Warrant Securities may not be redeemed until all of the Senior Securities have been redeemed.

The deadline for mutual banks and savings associations to apply to participate in the CPP is 5 p.m., Eastern Time, on May 14, 2009.  Participating mutual banks and savings associations will be subject to the executive compensation, transparency, accountability and monitoring guidelines applicable to other TARP recipients.  Senior Securities may be redeemed with the approval of the appropriate Federal banking agency at 100% of the issue price plus any accrued and unpaid interest.