Neighborhood Firms Caught Up in Panic : German Roots Help Tiny Ohio S&Ls; Cope

CINCINNATI —  When panicked depositors staged a massive run on Ohio’s non-federally insured savings and loan institutions last Thursday, Cincinnati’s Columbia Savings & Loan Co. had what was, by its standards, a busy day.

One customer came in to withdraw his savings.

Operating out of a Vine Street storefront next to Zino’s restaurant in the old Corryville section of Cincinnati, Columbia has just one full-time employee, $6 million in assets and, until last summer, was only open once a week--on Thursday evenings.

Columbia, like many of Cincinnati’s other small S&Ls; that were ordered shut by Ohio Gov. Richard F. Celeste last Friday, hasn’t changed much since it was founded by German immigrants in 1892.

It still reinvests virtually all of its deposits in home mortgages and personal loans in its neighborhood, and its customer base is still made up almost exclusively of a close-knit group of relatives and neighbors who have kept their money at Columbia for generations.

They know Columbia so well, in fact, that they almost never have to stop in at its office--they do their banking over the phone or by mail.

“We had no type of run last week because our customers know us,” says Steve Wood, president and sole full-time employee of Columbia, which was allowed to reopen Monday by state officials after it received federal deposit insurance. “Our customers have been referred to us by their families or their friends.”

Many of the other small, privately insured S&Ls; shut down last week also did not suffer major runs, at least in part because they have remained close to the Cincinnati neighborhoods where they were founded.

S&L; executives here note that last week’s crisis was limited to a handful of the larger and better-known institutions, which have been expanding in recent years by aggressively seeking new customers throughout the Cincinnati-Dayton metropolitan area.

“The companies that were very aggressive and grew very quickly were the ones that suffered the heaviest outflows last week,” says Warren Paulins, a spokesman for the Ohio Savings and Loan League. “It was really limited to four or five companies, and their problems put pressure on the rest.”

“These are good companies, many with strong balance sheets, and most of them could have withstood a run,” insists Robert F. Reckman, a Cincinnati attorney and chairman of Columbia.

But all of Ohio’s 71 state-chartered thrifts were caught up in the crisis when Celeste ordered a bank holiday and announced that none could reopen until they qualified for federal deposit insurance through the Federal Savings and Loan Insurance Corp.

On Wednesday, Celeste and officers of the closed S&Ls; agreed on new regulations that allow institutions that apply for federal insurance or otherwise demonstrate to state officials that they can meet depositors’ demands to reopen on a full-service basis, with no limits on customer withdrawals or deposits.

Celeste’s declaration of a bank holiday, which doesn’t affect commercial banks or S&Ls; that already have federal deposit insurance, is believed to be the nation’s most extensive shutdown of financial institutions since the Great Depression.

As a result, the effects of Ohio’s bank holiday have fallen most heavily on some of America’s smallest and most conservative savings and loans, clustered here in Cincinnati, a town that boasts of having the highest concentration of savings institutions of any city in the country. It is home to more than half of the state-chartered S&Ls; affected by Ohio’s bank holiday.

The reasons why so many of these modest S&Ls; were caught up in such a dramatic crisis--and why the crisis has largely been isolated in southwestern Ohio--date to the firms’ origins in the German working-class neighborhoods of Cincinnati in the late 19th Century.

Many of Cincinnati’s existing S&Ls; were founded in the 1880s and 1890s as German bauvereins , or building associations, formed by thrifty German immigrants who pooled their savings so they could build houses in their neighborhoods.

They were also suspicious of big banks and formed their associations so they could keep their money close to home, where they knew it would be safe.

Each bauverein member would regularly pay in a small amount until there was enough in the association’s fund to make a home loan to one of the members. Members then bid for the loan by offering up-front loan fees, and further loans were made after the winning bidder paid back his borrowings.

The directors of each bauverein, who held other full-time jobs, would usually meet one night a week in the bar of their neighborhood turnverein, or recreation hall, to handle their organization’s financial affairs.

“Nobody got involved in the bauvereins for the money,” observes Columbia’s Reckman. “Originally, they did it because it was the only way any of them could afford to buy houses. It was a community thing.”

Gradual Evolution

As German immigrants flooded into town and came to dominate Cincinnati in the mid- to late 19th Century, dozens of back-room bauvereins were established throughout the city. And as Cincinnati grew after the turn of the century, they gradually evolved into regular building and loan associations open to the public.

Despite their lack of deposit insurance, many survived the banking crisis of the Depression, but most remained small and concentrated on local mortgage lending. As late as the 1940s and 1950s, at least some were still open only one night a week and were run by part-time managers who held other jobs in the neighborhood.

But after World War II, Cincinnati’s larger savings and loans started advertising the fact that they were backed by federal deposit insurance--first introduced in 1934--putting the uninsured neighborhood S&Ls; at a competitive disadvantage.

These smaller S&Ls; did not qualify for federal insurance because federal rules required that covered institutions be open during normal business hours throughout the week.

At the same time, a few larger Cincinnati S&Ls; run by conservative businessmen were opposed to federally backed deposit insurance on the philosophical grounds that they didn’t want officials from Washington examining their books.

Membership a Boon

So, to fight the threat posed by bigger, FSLIC-backed S&Ls;, the non-federally insured thrifts created their own private insurance fund in 1955, called the Ohio Deposit Guarantee Fund, in order to convince their customers that their deposits were secure.

In the high-inflation era of the late 1970s and early 1980s, membership in the private fund became a boon to larger S&Ls; seeking to expand. Since they were not bound by federal regulations limiting the amount of interest that could be paid on passbook savings accounts, they were able to lure customers away from FSLIC members by paying as much as 10% interest on passbook accounts.

The high rate on passbook accounts offered the added advantage of enabling depositors to withdraw their money whenever they wanted without paying interest penalties. (Federally insured S&Ls; still cannot pay more than 5.5% interest on passbook savings accounts, and Cincinnati’s privately insured thrifts have continued to pay higher rates despite the slowdown in inflation.)

So the most aggressive state-chartered S&Ls;, including Home State Savings Bank, Charter Oak Savings Assn. and Molitor Loan & Building Co., took the risk of doing without federal insurance in order to grow.

“The larger (privately insured) firms were offering higher rates that federally insured S&Ls; couldn’t match, and they were expanding their customer base,” observes Michael Brennan, managing officer of Cincinnati’s Lenox Savings & Loan Co. and a historian of the local thrift industry.

Panic Began

But the odds finally caught up with them this month. After it was revealed that Home State might lose $100 million because of its extensive business dealings with ESM Government Securities Inc., a Florida securities firm that collapsed March 1, depositors began a run on Home State, which was closed and seized by the state March 9.

It quickly became clear that the $130-million private insurance fund might be liquidated by Home State’s collapse, and depositors at other non-federally insured thrifts--most visibly Molitor and Charter Oak--began to panic. Customers who had deposited funds in high-rate, easy-access passbook savings accounts were able to pull their money out immediately--and did so.

Charter Oak’s net assets dropped to $319 million from $350 million just last week, according to company spokesman Bob Chappell.

“I think you will find a very direct correlation between the companies that had been doing aggressive marketing in search of new customers and the ones that suffered runs,” Columbia’s Wood says. “They had a lot of new customers with no ties to the institutions.”

Even after the Ohio Legislature authorized $90 million in new deposit insurance, the panic widened, forcing Celeste to call for the banking holiday last Friday.