Risk & Compliance

Stop Paying Divs, Fed Tells Three Banks

It also orders the small financial institutions — Michigan Heritage, Birthright, and Cherokee Bancshares — to make other changes "to maintain finan...
Stephen TaubDecember 22, 2008

The Federal Reserve Board ordered three small banks to stop paying dividends and make other changes “to maintain the financial soundness” of the institutions. It is also requiring the banks to seek Fed approval before taking certain actions, and in some cases called for the banks to submit progress reports, including about their lending restrictions under certain situations.

The three banking companies are Farmington Hills, Mich.-based Michigan Heritage Bank, Montgomery, Ala.-based Birthright Inc. and St. Paul, Minn.-based Cherokee Bancshares.

The Fed specifically told the banks they are not to declare or pay any dividends without the prior written approval of the Reserve Bank, the director of the Division of Banking Supervision and Regulation of the board of governors, and Office of Financial and Insurance Regulation. All requests for prior approval must be received by the Reserve Bank and OFIR at least 30 days prior to the proposed dividend declaration date and must contain, at a minimum, current and projected information on earnings, capital, asset quality, and loan loss reserve needs of the Bank.

In its agreement with Birthright, for example, the Fed ordered the bank and its nonbank subsidiary not to make any distributions of interest, principal on subordinated debentures or trust preferred securities without the prior written approval of the Reserve Bank and the Director.

The Fed ordered Cherokee and its nonbank subsidiary not to make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without the prior written approval of the Reserve Bank and the Director. “All requests for prior approval shall be received by the Reserve Bank at least 30 days prior to the proposed dividend declaration date, proposed distribution on subordinated debentures, and required notice of deferral on trust preferred securities,” it added.

The requests must contain current and projected information on Birthright’s capital, earnings, and cash flow; the Bank’s capital, asset quality, earnings, and allowance for loan and lease losses; and identification of the sources of funds for the proposed payment or distribution. For requests to declare or pay dividends, Birthright also must demonstrate that the requested declaration or payment of dividends is consistent with the board of governors’ policy statement on the payment of dividends by state member institutions, dated Nov. 14, 1985.

The Fed also said Birthright and any nonbank subsidiary cannot, directly or indirectly, incur, increase, or guarantee any debt without the prior written approval of the Reserve Bank. It also cannot purchase or redeem any shares of its stock without the prior written approval of the Reserve Bank. The Central Bank is also requiring Birthright’s Board to submit to the Reserve Bank written progress reports detailing the form and manner of all actions taken to secure compliance with the provisions of this Agreement within 30 days after the end of each calendar quarter following the date of the Agreement.

The agreement with Michigan Heritage Bank is far more sweeping. For example, it order the bank not to extend or renew any credit to a borrower, who has credit that has been charged off by the bank or classified as a “loss.” The bank also cannot extend or renew any credit to a borrower whose extension of credit has been classified as “doubtful” or “substandard.” In addition, within 60 days Michigan Heritage must submit a written plan designed to improve its position through repayment, amortization, liquidation, additional collateral, or other means on each loan or other asset in excess of $500,000, including other real estate owned that is past due by more than 90 days, is on the bank’s problem loan list, or was adversely classified in the report of examination.

Within 30 days after the end of each calendar quarter, the bank also must submit a written progress report to the Reserve Bank and OFIR to update each asset improvement plan.

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