Fed, state order Home Savings to restructure

By HOLLY SCHOENSTEIN

Vindicator staff writer

YOUNGSTOWN — Less than a month after dropping government accounts, Home Savings and Loan announced Wednesday that federal and state regulators have issued cease and desist orders mandating changes to other business practices.

As a result of a routine audit in January, Youngstown-based United Community Financial Corp., Home Savings’ holding company, consented to several actions, including debt reduction, suspension of payment of dividends and improved risk management.

Doug McKay, UCFC chairman and chief executive, said Home Savings customers can remain assured that their deposits are safe.

“We’re going to comply with this order, and this [issue] will eventually go away,” McKay said.

The Office of Thrift Supervision regulates UCFC. The Federal Deposit Insurance Corp. and the Ohio Department of Commerce regulate Home Savings and Loan. State and federal regulators declined to comment on the financial stability of the organizations or the specific enforcement order.

Although state law prohibits the organizations from sharing the audit’s findings, McKay said regulators found the issue to be one of liquidity.

UCFC took out a $40 million loan six years ago for Home Savings and Loan operating expenses, and the outstanding balance is more than $14 million. McKay noted that within the last year, the bank paid the loan down from $36 million.

Among actions regulators ordered the bank to take are refraining from incurring additional debt, submitting a debt reduction plan within 45 days and refraining from repurchasing any of its own stock.

The company must also notify the Office of Thrift Supervision of the proposed addition of any member to its board of directors, the hiring of any individual as a senior executive officer, or a change in the responsibilities of any senior executive officer.

McKay said the company does not intend to make any board changes, and that the language in the order referring to this is standard.

The company has been restricted from making any “golden parachute payments.” These payments are contractual agreements, usually between companies and upper level executives, that provide compensation when their employment is terminated.

In addition to these requirements, the bank said Wednesday that it has addressed or is addressing other requirements, including creating new plans for profitability, capital, management and organizational structure.

McKay said the bank has been ordered to reduce its exposure to certain types of real estate and construction loans, known as “speculative construction loans.” The average person seeking a loan to buy or build a home should not have any additional trouble, he added.

While McKay did not specifically outline the bank’s plans to comply with the orders, he said Home Savings has already implemented some of the items, including the debt reduction plan and hiring risk management consultants. McKay said these changes are expected to strengthen the bank.

“All of the things in the order we feel we can easily comply with without having an impact on day-to-day business of the bank,” McKay said. “This is not a severe situation, not a bank closing; it doesn’t put anybody’s deposits at risk.”

UCFC’s stock dropped 36 percent Wednesday, closing at $3.73 a share, down from the $5.85 opener.

Several area banks’ stocks have weathered challenging industry conditions.

On a national level, the shutdown of IndyMac Bank in California by federal regulators last month and the wavering stability of mortgage giants Fannie Mae and Freddie Mac have shaken the confidence of many depositors.

Jim Sinegal, a banking analyst at Morningstar Inc. in Chicago, said more banks are receiving enforcement orders because of the state of the banking industry.

“Some banks get them and manage to improve things,” Sinegal said. “It’s a first step; sometimes it gets better, and sometimes it gets worse. It depends on how well the bank’s management handles the situation.”

On July 23, Home Savings said it had stopped taking government accounts, calling them too expensive.

Jim Phillips, South Range schools treasurer, said he quickly moved the district’s $3 million to Farmers National Bank on July 10, the day after Home Savings notified him of the change. Phillips said he feels responsible for the taxpayers’ funds.

“I don’t want to say that I was afraid of losing money tomorrow, but by taking it out, I guaranteed that would not happen,” Phillips said at the time.

hschoenstein@vindy.com