By MICHELLE PARK for Crains Cleveland Business

4:30 am, December 12, 2011

Ohio Savings Bank has been informed by its regulator that its lending in Northeast Ohio is insufficient and needs to improve — a fix that the head of its parent company expects to come “relatively quickly” as the bank ramps up a new marketing strategy that's already under way.

The Federal Deposit Insurance Corp.'s evaluation of Ohio Savings, a division of New York Community Bank, hasn't been made public. However, a copy of the 130-page report obtained by Crain's from the bank reveals the institution received “needs to improve” ratings in two of its five markets: Ohio and Florida. The rating is one step above the lowest rating of “substantial noncompliance.”

“The fact that this happened was a bit of a surprise,” said Joseph Ficalora, president and CEO of New York Community Bancorp. 

“The fact is, it's unacceptable,” he said. “People are being delegated to fix the problem.” 

At issue is the bank's performance as it pertains to the Community Reinvestment Act, which requires that banks meet the credit needs of their entire communities, including low- and moderate-income neighborhoods, consistent with safe and sound operation. 

According to the performance evaluation, “The bank's lending activity in the Ohio assessment area is low when compared to the branching network and deposit share in Ohio. Specifically, while 11.7% of the bank's total deposits are from within the Ohio assessment area, only 1.4% of the loans were from the same area.” 

However, the report also noted that when it comes to residential mortgages, “the bank is extending a good portion of loans to low- and moderate-income borrowers.” 

In addition, the FDIC found a “poor level” of qualified community development investments and grants in the bank's Ohio assessment area, and called its performance in retail banking poor as well. The report specifically makes note of the much-opposed closure of a branch near Shaker Heights. 

Bankwide, New York Community's rating dropped to satisfactory in the latest FDIC evaluation from the outstanding mark it received in 2008, bank officials said. Its ratings in New York, New Jersey and Arizona were satisfactory, though the newest report calls its performance in Arizona “marginally adequate.” 

The vast majority of banks receive either satisfactory or outstanding CRA ratings, FDIC spokesman David Barr said. 

Mr. Ficalora expects the fix for Ohio Savings Bank to come “relatively quickly” and certainly by the time of the next exam, which historically has taken place about every three years.

End of the "de-risking' phase

In what executives say is a move unrelated to the CRA ratings, New York Community Bank is deploying a new marketing strategy. Its goal is to gain greater visibility and to issue more loans in the more than 270 bank branches it operates in five states. 

The bank's new strategy will deliver “more of a bold statement than we've made in the past,” said Cindy Flynn, executive vice president and chief administrative officer of New York Community Bancorp. 

“This is the first time in this marketplace where we've gone out” and done marketing and promotions, Ms. Flynn said. “Our goal is to grow our deposits in all our markets.” 

New York Community, which has completed 10 acquisitions in the past 10 years, has focused historically on growth by acquisition. As such, it has had little use for marketing and campaigns, Ms. Flynn said. 

Its new strategy so far has spawned a Switch & Save marketing campaign intended to acquire the deposits of new households. The bank is promoting its free checking account and is offering a 10-day CD that's tied to the six-month CD rate and allows deposits and withdrawals every 10 days. The product's minimum balance of $1,000, Ms. Flynn said, is lower than is typically required. 

Also, during the holidays, each branch is holding four weekly drawings for free Nook e-readers for people who simply walk into any branch and fill out a sweepstakes entry form. 

New York Community officials say the lower CRA ratings in Ohio and Florida are the result of a transition period that occurred after New York Community in December 2009 acquired failed AmTrust Bank, which in Ohio it renamed Ohio Savings Bank — the name by which it was known for most of its existence. It entered Ohio, Florida and Arizona via the acquisition. 

“There is definitely a transition period where you are just trying to stabilize yourself,” Ms. Flynn said. 

From mid-2008 to the present, the bank was “de-risking” its balance sheet, according to Ms. Flynn. Ohio Savings no longer was originating loans and putting them on its balance sheet, though it was originating loans and selling them, she said. 

Now that the bank is at a point where it believes it has achieved stability, it's focused on increasing its single-family and multifamily mortgage lending in this market. It has not done multifamily lending previously in Ohio but will expand it here next year, Ms. Flynn said.

Change brings challenges

Though he said it'd be unfair for him to comment directly on New York Community's ratings, Sal Maiorana, a former Federal Reserve Bank examiner who has examined banks for CRA compliance, said it isn't far-fetched to blame worsened ratings on a transition like the one New York Community has undergone. 

“A lot of times when change occurs and institutions are kind of operating new business strategies, things fall through the cracks,” said Mr. Maiorana, chief risk officer and a senior vice president for Geauga Savings Bank. “When you're in a state of transition, it's very easy to not cross a "t' or dot an "i.'” 

CRA ratings can affect a bank's ability to open new branches or expand operations, said FDIC spokesman Greg Hernandez. 

A lower CRA rating also can impact an institution's reputation in a market, Mr. Maiorana said. 

“People read that and they say, "Oh, you're not lending to blacks or Hispanics' ... it does create a problem,” he said. “Right or wrong, that's what happens.” 

The Ohio Fair Lending Coalition has been a vocal critic of Ohio Savings' lack of lending in this region and its closure of the branch in Cleveland's Larchmere neighborhood in December of last year. 

In a recent news release, Alanna Ferguson, a leader of the Ohio Savings Neighborhood Alliance of the coalition, was quoted as saying, “Just because Ohio Savings is now owned by an out-of-state bank does not allow New York Community to put a red line through our community, and not reinvest our deposits back into the community.” 

The fair lending coalition is planning a protest at Ohio Savings' Cleveland headquarters after Jan. 5, when the FDIC is scheduled to release publicly the bank's CRA rating. The group wants the bank to offer, among other things, a loan product marketed to the community and locally processed and administered. 

“I think the goal here is ... to make sure they improve their lending here in Greater Cleveland,” coalition director Chip Bromley said. He said he hopes to see the bank “truly take its place at the table and work on credit issues in our community.” 

For its part, the city of Cleveland's Department of Finance and Department of Community Development recently recommended to Cleveland City Council that it not use New York Community as a depository for the city's active deposits during 2012-13. 

A Nov. 4 report cited both the closure of the Larchmere branch, which the city had opposed, and the bank's loan-to-deposit ratio for not recommending New York Community.