Mar
29

Memorandum of Understanding

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As I mentioned, UBT has entered into a Memorandum of Understanding with the FDIC and the State of Michigan.  Does anybody realize what this means?

I looked on the web and and found the FDIC’s Risk Management Manual of Examination Policies.  What I found was troubling.  I will now quote from what I found on the FDIC’s website:

“By definition, institutions which have been assigned a composite 3 rating pursuant to the Uniform Financial Institutions Rating System have overall strength and financial capacity sufficient to make failure only a remote possibility. However, their weaknesses are such that if not properly addressed and corrected, deterioration could concur. The memorandum of understanding is a means of seeking informal corrective administrative action from institutions considered to be of supervisory concern, but which have not deteriorated to the point where they warrant formal administrative action. It is the policy of the Division of Supervision that matters in need of corrective action within such institutions should be addressed in the form of a memorandum of understanding. This is in lieu of the use of letter agreements, board resolutions passed at the request of the Regional Director, or other forms of bilateral or unilateral agreements. As a general rule, and as a minimum, this informal administrative action is to be considered for all institutions rated a composite 3. General use of a memorandum of understanding for composite 3 rated institutions does not rule out recourse to formal enforcement action when it is believed management is unwilling to take necessary corrective action, nor does it prohibit use of a memorandum of understanding in situations where other than a composite 3 rating is assigned”.

To me this says a few things:

  1. The bank examiners determined that the bank was rated a composite 3.  This is in the middle of the range (Rankings are between 1 and 5).  Not nearly as strong as the bank would have us believe.
  2. The memorandum concentrates on the bank’s capital, and the bank agrees to significantly beef up its capital ratios.

Again from the FDIC website regarding the definition of a Composite 3 rating:

“Financial institutions in this group exhibit some degree of supervisory concern in one or more of the component areas. These financial institutions exhibit a combination of weaknesses that may range from moderate to severe; however, the magnitude of the deficiencies generally will not cause a component to be rated more severely than 4. Management may lack the ability or willingness to effectively address weaknesses within appropriate time frames. Financial institutions in this group generally are less capable of withstanding business fluctuations and are more vulnerable to outside influences than those institutions rated a composite 1 or 2.”

In the next paragraph, though the FDIC states that failure appears unlikely.  Which is good for us shareholders.

The next issue is what is the definition of the terms that the bank agreed to?  My definitions (which may not be correct – there may be more precise definitions in the banking world) suggests that the bank has a long way to go to meet the agree to capital requirements.  But according to Note 18, Here is what the bank agreed to:

“UBT will have and maintain its Tier 1 capital ratio at a minimum of 9% within six months from the date of the MOU and for the duration of the MOU, and will maintain its total capital ratio at a minimum of 12% for the duration of the MOU.”

What this means to me is this:

  • According to my calculations, the bank needs $81.8M in Tier 1 Capital (common or preferred stock).  It currently has $78M in Tier 1 capital according to Note 18 so it needs another $4M to meet that requirement. 
  • In addition, the bank needs a total of $109 M of Total Capital.  The bank currently has $80.9 M so it needs another almost $29M in capital to meet that requirement.

So the questions is:  What’s the plan?  How’s the bank going to do that?  How’s it going to raise $29M in additional capital, and an additional $20 M to buy back the stock owned by the US  Treasury?

That’s what I’m going to ask at the April Shareholders Meeting.

Categories : MOA

2 Comments

1

Found United Bank and Trust (UBT)slogging through a bunch of microcap value trap banks, not sure how Bauer got this thing 3 1/2 stars.

Bankrate.com has a nice quick over view for banks, I start there and generally ignore everything under 3 stars, 1 star may have a date with the FDIC. You nailed it with the Tarp funds here.

Here’s a link to bankrate’s review of UBT

http://www.bankrate.com/rates/safe-sound/memorandums-memos.aspx?fedid=401148

If it doesn’t work you can go to bankrate.com and search by state and city.

Ask them what the difference is between non performing loans at 32.6MM and non-accrual loans at 26.1 MM, the latter just hasn’t gone bad yet?

2

Thank you for your great comment.

I had heard of http://www.bankrate.com but didn’t realize that the site did an analysis of bank stocks. I used the link you submited, and found that it did an analysis of the Lenawee county subsidiary of UBT. UBT has two subsidiaries- Lenawee county and Washtenaw county, at least it did prior to 2010. In early 2010, it consolidated both subs into one corporate structure. I’ve been looking at the consolidated figures and hope to later look at them seperately and see what I can determine.

Regarding your comment of non accrual loans vs non performing loans: Beginning on page A-9 of the 2009 Annual report, the bank shows a credit quality analysis. The main point is that they broke out the “CLD” portion of the non performing loans (CLD means Construction and Land Development) and showed that the CLD piece of the Non performing loans is $14.1M or 43% of the total Non performing loan value of $32.7M. I’ll look for the non accrual loan total of $26.1M you mentioned, and if I can’t find it I’ll ask them next week. These numbers lead me to wonder whether they’ve accrued enough allowance for loan losses. They’ve accrued $20.0 M, but as you show, they are looking at over $30M in non performing loans. Shouldn’t they accrue a number closer to $30M?

I suspect that you’re right- the $32.7M includes the non accrual. It would be horrible if there are two categories: Non Accrual loans

    and

Non Performing loans. That would be twice as bad.

Thanks again for your great comment.

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