Regulators getting more active in the banking sector

One thing worth noting amid all the chaos in the banking sector: Regulators are getting much more hands-on in terms of restricting certain banking activities. United Community Financial Corp. is just the latest firm to announce a crackdown. From Bloomberg:

"United Community Financial Corp., the Youngstown, Ohio-based savings and loan, said U.S. regulators ordered it to restrict lending and raise capital.

"A cease-and-desist order was issued by the Federal Deposit Insurance Corp., the Ohio Department of Financial Institutions and the U.S. Office of Thrift Supervision, the lender said in a statement today. United Community must create a plan to reduce debt, improve risk management and find more capital.

"There will be a short-term negative impact on earnings due to higher compliance costs associated with the order,'' United Community said in the statement. The company said it was profitable in the first two quarters of 2008.

"United Community, which runs more than 60 branches of Home Savings and Loan and Butler Wick in Ohio, Pennsylvania and western New York, has declined 12 percent in the past year in Nasdaq Stock Market trading."

UCFC is the holding company for Home Savings and Loan Company and Butler Wick. The company operates in Ohio, New York, and Pennsylvania. Total assets were $2.7 billion at June 30.

Vineyard National Bancorp, with $2.4 billion in assets, is another example of this trend toward tighter oversight. So is Downey Financial, a $12.6 billion institution that was a major option ARM lender during the housing bubble. From the firm's latest 10-Q:

"After the end of the second quarter, the Bank experienced elevated levels of deposit withdrawals. More recently, in response to steps taken by management to address the situation, the Bank has experienced net deposit inflows. If the Bank’s deposit levels continue to stabilize with withdrawals at historical levels, Downey believes its current sources of funds would enable Downey to meet its obligations while maintaining liquidity at appropriate levels. However, if elevated levels of net deposit outflows resume, the Bank’s usual sources of liquidity could become depleted, and the Bank would be required to raise additional capital or enter into new financing arrangements to satisfy its liquidity needs. In the current economic environment, there are no assurances that we would be able to raise additional capital or enter into additional financing arrangements.

"The OTS restrictions on the Bank’s and the Holding Company’s ability to pay dividends, and on the Holding Company’s ability to issue new debt or renew its existing debt, may adversely affect our ability to pay dividends and ultimately to service our Holding Company debt.

"Our ability to pay regular quarterly dividends to our stockholders and to pay interest on our debt at the Holding Company level depends to a large extent upon the dividends we receive from the Bank. The OTS, the Bank’s principal regulator, has prohibited the Bank from paying dividends to the Holding Company without the OTS’s prior approval. In addition, the OTS has prohibited the Holding Company from paying dividends (after the quarterly dividend payable in August 2008) without the OTS’s prior non-objection."