High-risk loans drew attention to Home

By HOLLY SCHOENSTEIN

Vindicator staff writer

YOUNGSTOWN — Banking analysts say Home Savings and Loan and its parent company are not in distress despite federal and state regulators’ hitting the institution with reorganization orders.

But they said significant flaws attracted regulators’ attention to some of the organizations’ business practices and operations.

“This is a more intense review of the bank’s practices; it’s more formal than what [the regulators] usually do,” said Jim Sinegal, banking analyst at Morningstar Inc. in Chicago. “Most banks don’t get this order; it’s an escalation, basically.”

The 30-page cease-and-desist order to Home Savings and its holding company, United Community Financial Corp, outline steps that they must follow to correct problems in a timely manner.

Among the demands:

• Requiring the bank to diversify its loans to move away from those that are considered high-risk, such as land development and construction loans.

• Requiring the bank to move some of its business to loans that are considered lower-risk, such as mortgage loans.

• For the high-risk loans that it does keep, the bank is prohibited from lending additional money to customers who are having trouble paying off existing balances.

The bank “has a high level of delinquencies, and the regulators want to know what it plans to do about it,” Sinegal said.

A day after Wednesday’s announcement of the action, UCFC stock closed down 1 cent at $3.72 Thursday.

Home Savings said there was no strong customer reaction Thursday to the news. Other banks reported some inquiries.

“This is a very serious issue with the regulators,” said Fred Cummings, former banking analyst and current hedge fund manager at Elizabeth Park Capital in Cleveland. “How you know this is serious is that UCFC has to get the board of directors’ approval before it pays dividends.”

The requirements outlined in the orders are a mix of items specific to Home Savings and Loan, those given to banks that have been identified as struggling with credit and or risk issues, and standard language applicable to all banks that receive cease-and-desist orders.

“The most important thing is that [Home Savings] has strong capital and has been profitable in the first and second quarters of this year,” Cummings said. “The regulators have acted early. This bank is not in distress; this is manageable, even though it is struggling.

“In general, regulators have been getting more aggressive, and there’s definitely more banks with problems because the industry isn’t doing too well,” Sinegal said.

The bank issued a statement Thursday confirming its consent to comply with the order and briefly describing the areas in which it plans to make changes. But Doug McKay, UCFC chairman and chief executive, said specific details about the plans have not been finalized as the order was recently issued.

Home Savings and Loan and UCFC should not have been surprised by the order, said Cummings.

In April, UCFC called off a deal to buy the parent company of Park View Federal Savings Bank, which has 17 branches in Cleveland. The local company said the reason it canceled the deal was that it wanted to concentrate on delinquent-loan issues.

“My sense is that [the order] did not come as a surprise to United Community because the reason the merger did not go through was because of some of these issues,” Cummings said.

He added that regulators issued the order based on the bank’s performance at the end of last year and the beginning of this year.

“This does not reflect a recent deterioration in their performance,” Cummings said.

Despite news about the order, Home Savings and Loan said it has experienced little change in normal foot traffic.

“I’ve been out in the largest branch [in Boardman] for about 20 minutes today, and there was very little concern,” said Jay Gikas, Home Savings and Loan senior vice president of retail.

He said a small number of the bank’s customers inquired about the security of their deposits and about Federal Deposit Insurance Corp. coverage. A few customers withdrew their account balances or redistributed their money within the bank, but he said those cases were mostly limited to situations in which FDIC coverage did not apply. FDIC coverage insures deposits at member institutions, up to $100,000.

Other area banks and credit unions, however, have experienced an uptick in customer inquiries regarding the security of their accounts and applicable insurance for their deposits.

Michael Kurish, president and CEO of Austintown-based Associated School Employees Credit Union, said customers have called periodically within the last couple of days.

Customer inquiries increased immediately after the news of California-based Indy Mac bank’s failure, but he said the situation with Home Savings is different because it “hits a little closer to home.”

“I have not seen anybody who has been overly concerned that they’re making changes to their deposits or anything along those lines,” Kurish said.

“We thought about putting a statement on our Web site, but we didn’t want to create more of a concern. We’re just going to be prepared to do something if the concerns of the members become numerous enough.”

Making the required changes at Home Savings and UCFC will not happen overnight.

“It’s going to take some time before this cease-and-desist order [can] be lifted because they have a lot of deficiencies to correct. They’re looking at a least a year that they’ll be operating under it,” Cummings said.

If regulators feel the bank has not adequately made the requested changes outlined in the order within the specified time period, further action could be taken. Among the changes could be a rearrangement or replacement of top management.

“If this management team can’t get it done, they’ll get new management at the top; the CEO will likely lose his job, and there will be changes in the board,” Cummings said.

Cummings said, however, that this significant shake-up of management is not likely. He said the questions is not if the bank will survive, but who will manage it.

hschoenstein@vindy.com