MUTUAL NEWSLETTER SPECIAL EDITION—ACB DEFENDS MUTUAL CHARTER

In the last edition of “A Mutual Exchange,” sent to you on March 24, 2006, we reported on activities of a minority shareholder group that is seeking to advance legislation in Congress that would allow the transfer of the majority mutual interest in an MHC to minority public shareholders. This would enable them to appoint all of the directors and force second step conversions. ACB is actively opposing this proposal.

On Friday, March 31, 2006, the American Banker printed a Viewpoint article entitled “Standards for Mutuals In Dire Need of Change.” The article, written by an associate of Larry Seidman, an activist minority shareholder, argues that mutual holding companies and mutually-owned thrifts have weak corporate governance standards that should be changed. Clearly, this article is intended to bolster support for the minority shareholder congressional proposal.

ACB has submitted the following response defending mutual institutions and we expect it to be be printed in the Friday, April 7, 2006, edition of the American Banker. The text of the letter is below.

We wanted you to be aware of these important developments in advance of the American Banker article. ACB is actively pursuing a legislative strategy at this time.

We will issue a member Action Alert in the near future asking members to become engaged in this issue and will provide further background information.

If you have any questions or concerns, please contact Patty Milon, ACB’s Senior Vice President of Regulatory Affairs at [email protected] or (202) 857-3121.

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To the American Banker

Re: Viewpoint on Standards for Mutual Holding Companies, March 31, 2006

The author of your March 31st Viewpoint entitled “Standards for Mutuals in Dire Need of Change,” finds something “particularly vexing” about mutual banks, and especially about mutual holding companies (MHCs). As the president and CEO of Connecticut Mutual Holding Company, an MHC in Litchfield, Conn., and one of its two affiliate banks, Litchfield Bancorp, I find something vexing, too: That corporate raiders are so willing to misrepresent the facts about a form of banking organization that has served communities well in this country for almost 200 years.

About one statement I have no disagreement. There are those who would destroy mutuality for “the potential of outsized gains.” These corporate raiders do not care about the cooperative structures of mutuals that have allowed these institutions to operate for decades in the interest of community stakeholders. Corporate raiders care nothing for the community stakeholders’ interest in the value built up in these institutions by countless generations. What they do care about is wresting away the keys to the treasury to enrich themselves. Fortunately, there are rules and laws in place to prevent corporate raiders from trying to turn today’s vibrant mutual institutions into “Sunbeam Corporations,” to the detriment of community stakeholders.

I am also first vice chairman of America’s Community Bankers, which represents the majority of the 750 mutual depository institutions in the United States, of which 161 are mutual holding companies. Sixty-four of these mutual holding companies have issued stock; mine has not. MHCs are chartered by the Federal Reserve, as in our case, by the Office of Thrift Supervision or by state governments, and have been an important form of mutual organization since the late 1980’s.

A key point that is lost in the March 31st Viewpoint is that mutual institutions in general, and MHCs in particular, operate in a highly regulated environment. The claim that standards for mutuals are in “dire” need of change simply is not accurate. In fact, this is used merely as a pretense to express concerns about “corporate governance” to hide the real goals of those who would be enriched by such changes.

Mutual banks are subject to rigorous examination and supervision, and MHCs that do issue stock are further subject to the rigors of being registered issuers under the Securities Exchange Act of 1934. Not only are many of the bank subsidiaries of the MHCs subject to the audit and internal control requirements of FDICIA, the corporate governance and internal control provisions of Sarbanes-Oxley also are applicable. MHCs are as transparent as any other regulated entity.

Mutual holding companies were developed to provide mutual institutions a mechanism to raise capital and give them some corporate flexibility without giving up their cooperative status. When a mutual forms an MHC and raises capital through a public offering of minority shares, the same regulated process is followed as in any public offering. The process provides maximum disclosure to the depositors and members of the community who subscribe to the offering, and to the investors who purchase the remaining shares, if any.

The shares purchased in the subscription and community offerings often are acquired by customers and neighbors who are interested in the future of the institution, support community activities, and desire the retention of a stable community bank. For those depositors, the continued existence of the institution is more important than the “potential for outsized gains.” As a result of the disclosure requirements imposed by the Securities and Exchange Commission and the Office of Thrift Supervision, purchasers of these shares are given ample notice of the limitations and risks of purchasing minority shares of mutual holding companies. Further, many mutual holding company formations that have included a minority offering have also established a community foundation with a percentage of the proceeds.

The holding company board and the board of the resulting savings institution have a fiduciary duty to the holding company and the institution, respectively. They are required to look at transactions, whether a buyback, the declaration of a dividend or the decision about a corporate reorganization, with the same diligence that the board of a stock institution must use. The benefit plans that compensate management and the directors are described in proxy materials that are approved by the regulators and are voted upon by the shareholders. Shareholders receive notice of corporate actions that require their approval. The same rules and responsibilities governing the setting of compensation for the board members and management are applicable whether the institution is in mutual, stock or mutual holding company form.

Operational or administrative decisions at community banks — whether mutual or stock — are made by management as delegated by the board, and are made with a view to the safe and sound operation of the institution. Management at mutual institutions is tasked by the board of directors to run the bank and make day-to-day decisions. Mutual depositors on the other hand do not have a say in running the institution. The courts have found numerous times that depositors have limited interests.

The allegation of the March 31st Viewpoint that mutual holding companies and mutual institutions are operating without adequate oversight, of either stakeholders or regulators, is not supported by the facts. The regulator has continuous oversight over the performance and safe and sound operation of the institution through frequent and rigorous examination. The average equity capital of mutual institutions is 12.92 percent. Their level of non-performing loans is lower than their stock peers. Bottomline: these MHCs remain strong, independent, and vital institutions in the communities they serve.

Mutuals and mutual holding companies have almost 200 years of service to their communities, and they will continue to thrive into the 21st century.

Sincerely,

Mark E. Macomber
First Vice Chairman, America’s Community Bankers

President and CEO
Connecticut Mutual Holding Company and
Litchfield Bancorp
Litchfield, Conn.