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04.08.2009 | Legal Update

The Treasury Department on April 7 published term sheets for mutual holding companies (MHCs) to receive TARP investments that will qualify as Tier 1 capital under the Capital Purchase Program (CPP). The application deadline for mutual holding companies is 5:00 p.m. (EST) on May 7, 2009. No terms for stand-alone mutual banks have yet been issued.

There are three different investment programs for MHCs, depending upon whether the top-tier MHC owns a public or non-public mid-tier stock holding company, or does not have a subsidiary holding company at all. An MHC with a subsidiary stock holding company that wishes to receive a capital investment under the CPP will be required to cause its subsidiary holding company to issue senior preferred stock to the Treasury. An MHC without a subsidiary holding company that wishes to participate will be required to issue senior subordinated debentures to the Treasury. MHCs are eligible to receive investments of at least 1% of risk-weighted assets, up to the lesser of $25 billion or 3% of risk-weighted assets. For MHCs with subsidiary holding companies, the relevant measure for determining the amount of the CPP investment will be the risk-weighted assets of the subsidiary holding company.

1.  MHCs with Public Subsidiary Holding Companies

A bank holding company (BHC) or savings and loan holding company (SLHC) that is (a) owned and controlled by an MHC and (b) whose securities are traded on a national securities exchange and is required to file periodic reports under the federal securities laws will be subject to terms substantially similar to those applicable to public institutions that have received CPP investments. Only subsidiary BHCs and SLHCs that engage solely or predominantly in activities permissible for financial holding companies are eligible to receive a CPP investment. A subsidiary BHC or SLHC must submit a CPP application to its federal regulator and the federal bank regulator that supervises its largest subsidiary insured depository institution. Upon approval, the subsidiary BHC or SLHC will be required to enter into a standard form of securities purchase agreement and other closing documents, and issue to the Treasury non-voting, cumulative senior preferred stock and warrants to purchase shares of the institution’s common stock that then have an aggregate market value equal to 15% of the senior preferred stock investment.

Nutter Notes:  Dividends will be payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year at rate of 5% per annum until the fifth anniversary of the date of issuance, and then at a rate of 9% per annum. The issuer’s authority to declare or pay dividends on other equity securities is limited unless all senior preferred stock dividends are fully paid. The Treasury’s consent will be required for any increase in dividends on common shares for three years after the issuance of the senior preferred stock (unless the senior preferred stock has been redeemed or transferred to a third party). Issuers will be required to promptly file shelf registration statements covering the senior preferred stock, the warrants and the common stock underlying the warrants. The Treasury will have piggyback registration rights and the issuer will be required to take any steps reasonably requested by the Treasury to facilitate a transfer of the senior preferred stock, warrants or underlying common stock, including registration on a national exchange. There are also provisions in the Treasury’s summary of terms for the issuance of debt or other instruments, as determined by the Treasury, if the issuer is no longer listed on a national exchange.

2.  MHCs with Non-Public Subsidiary Holding Companies

A subsidiary BHC or SLHC whose securities are not traded on a national securities exchange will be subject to terms substantially similar to those applicable to private institutions that have received CPP investments. These terms also apply to subsidiary BHCs or SLHCs whose securities are traded over the counter (i.e., quotes listed on the OTC Bulletin Board or in the pink sheets). As with public companies, only subsidiary BHCs and SLHCs that engage solely or predominantly in activities permissible for financial holding companies are eligible to receive a CPP investment. CPP applications must be submitted to the subsidiary BHC’s or SLHC’s federal regulator and the federal bank regulator that supervises its largest subsidiary insured depository institution. Upon approval, the subsidiary BHC or SLHC will be required to enter into a standard form of securities purchase agreement and other closing documents, and issue to the Treasury non-voting, cumulative senior preferred stock and warrants to purchase additional shares of the institution’s preferred stock that then have an aggregate liquidation preference equal to 5% of the amount of the senior preferred stock investment.

Nutter Notes:  Dividends will be payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year at a rate of 5% per annum until the fifth anniversary of the date of issuance, and then at a rate of 9% per annum. The issuer’s authority to declare or pay dividends on other equity securities is limited unless all senior preferred stock dividends are fully paid. The Treasury’s consent will be required for any increase in dividends on common shares for three years after the issuance of the senior preferred stock (unless the senior preferred stock has been redeemed or transferred to a third party). Treasury intends to immediately exercise the warrants for the additional shares of preferred stock. If the issuer becomes subject to the periodic reporting requirements under the federal securities laws, it will be required to promptly file shelf registration statements covering the senior preferred stock and warrant preferred stock. The Treasury will have piggyback registration rights and the issuer will be required to take any steps reasonably requested by the Treasury to facilitate a transfer of the senior preferred stock or warrant preferred stock.

3.  MHCs without Subsidiary Holding Companies

An MHC that does not have a subsidiary BHC or SLHC will be subject to terms substantially similar to those applicable to institutions organized as S-corporations that have received CPP investments. Only MHCs that engage solely or predominantly in activities permissible for financial holding companies are eligible to receive a CPP investment. CPP applications must be submitted to the MHC’s federal regulator and the federal bank regulator that supervises its largest subsidiary insured depository institution. Upon approval, the MHC will be required to enter into a standard form of securities purchase agreement and other closing documents, and issue to the Treasury senior subordinated debentures and warrants to purchase additional senior subordinated debentures in an amount equal to 5% of the amount of the initial investment in senior subordinated debentures. The senior subordinated debentures will rank senior to mutual capital certificates or any other capital instruments authorized by state law, and subordinate to all other senior indebtedness of the MHC (unless the terms of the other debt obligations expressly make them pari passu or subordinate to the senior subordinated debentures).

Nutter Notes:  Interest will be payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year at rate of 7.7% per annum until the fifth anniversary of the date of issuance, and then at a rate of 13.8% per annum. Interest may be deferred for up to 20 quarters, but unpaid interest will cumulate and compound at the interest rate then in effect. The issuer’s authority to declare or pay dividends on any capital instruments is limited unless all interest on the debentures is fully paid. Treasury intends to immediately exercise the warrants for the additional senior subordinated debentures. As long as the Treasury holds any senior subordinated debentures, the MHC may not enter into any transactions with a related person unless the transaction is on market terms and has been approved by the MHC’s audit committee or a comparable body of independent directors, if any. If the MHC becomes subject to the periodic reporting requirements under the federal securities laws, it will be required to promptly file shelf registration statements covering the senior subordinated debentures. The Treasury will have piggyback registration rights and the MHC will be required to take any steps reasonably requested by the Treasury to facilitate a transfer of the senior subordinated debentures.

4.  Executive Compensation and Corporate Governance

Any MHC or subsidiary BHC or SLHC that receives a CPP investment from the Treasury will be required to comply with the limitations on executive compensation, transparency, accountability and monitoring set forth in the Emergency Economic Stabilization Act, as amended (EESA), and any guidance or regulations issued by the Treasury to carry out those requirements. The institution and its senior executive officers will also be required to execute a waiver releasing the Treasury from any claims they may otherwise have as a result of any modification of benefit plans and other compensation arrangements or agreements necessary to comply with the requirements of the EESA and Treasury’s guidance or regulations. The EESA requires each selling institution to meet “appropriate standards” for executive compensation and corporate governance. Those standards must include provisions to recover or “claw back” bonus or incentive compensation paid to senior executive officers and the next 20 most highly compensated employees of the issuer based on statements of earnings, gains or other criteria that are later proven to be materially false, as well as a prohibition against making any golden parachute payments to senior executive officers or any of its next five most highly compensated employees during the period that the Treasury holds an equity or debt position in the institution.

Nutter Notes:  The EESA, as amended by the American Recovery and Reinvestment Act of 2009 (ARRA), also prohibits each CPP participant from paying or accruing any bonus, retention award or incentive compensation to a specified number of employees, and prohibits any compensation plan that would encourage manipulation of reported earnings in order to enhance the compensation of any employee. The interim final rule on executive compensation requirements published by the Treasury also requires that the compensation committee of the board of directors of the institution (or a comparable board committee) meet with the institution’s senior risk officers within 90 days after the issuance of the senior preferred stock and at least annually thereafter to ensure that incentive compensation does not encourage excessive risks that threaten the value of the institution. The compensation committee of the board of directors of the institution must provide certifications of those assessments. For an institution subject to SEC reporting requirements, certifications should be disclosed under the Compensation Discussion and Analysis in periodic reports per Rule 402(b) of the SEC’s Regulation S-K. A private institution should file the certification with its primary federal regulator.

Nutter Bank Report

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