Driving home from work around 5 p.m. on Friday, February 24, 2012, I saw something strange going on at Home Savings of America, the bank on East Broadway across the street from the post office in Little Falls. The place was swarming with people, the parking lot filled with imposing SUVs and law enforcement vehicles. It looked like a federal raid. And, in a way, it was.
The Federal Deposit Insurance Corporation (FDIC) took over the bank after it was closed by the Office of the Comptroller of the Currency (OCC) for “substantial dissipation of assets and earnings due to unsafe or unsound practices. The OCC also found that the institution incurred losses that depleted its capital, the institution [was] critically undercapitalized, and there [was] no reasonable prospect that the institution will become adequately capitalized without federal assistance.” (1)
Agents of the FDIC spent months at the bank, combing through records and readying physical assets – bank furnishings, office equipment, the building – for public sale. An online auction of the interior furnishings was held through Penny Worley Auctioneers in July 2012. The building was purchased by Central Minnesota Credit Union in August 2012.
Through the closing of Home Savings, Little Falls became a community directly impacted by the home mortgage banking scandal that has been a key feature of the severe economic downturn that began in 2007. As of September 28, there have been 42 failed banks in 2012, including Home Savings, which had three other branches in California. While Home Savings failed due to “troubled assets,” a term often used in relation to current bank failures, what’s unusual in this situation is that the FDIC could not find another bank to purchase Home Savings, partially because it was so severely undercapitalized.
In examining online financial reports, even more striking is how quickly it became undercapitalized.
Home Savings of America started life as Little Falls Federal Savings & Loan in 1934, when a group of 30 investors paying $100 each applied for a charter in May that year. Temporary officers of the new organization were J.C. Patience, president; A.F. Koslosky, vice president; and John Vertin, secretary. (LF Herald, May 11, 1934) The charter was granted and on July 12, 1934, the stockholders held their first official meeting, during which J.C. Patience, Aloysius Simonet, Austin Koslosky, William Molde and John Vertin were elected to the board of directors.
At the time, Savings & Loan associations served functions distinct from banks and had a different federal regulatory agency. The primary focus of a Savings & Loan was to provide loans to encourage home ownership. When Little Falls Federal was founded, the government put three dollars in for every dollar subscribers invested in the association, which “[made] loans to refinance mortgages and to remodel homes, the latter object being the prime reason for the [home owners’ loan] act.” (2)
The first location of Little Falls Federal was in John Vertin’s office at 70 East Broadway. In 1943, when W.C. Weber replaced John Vertin as secretary-treasurer, the association relocated to his office at 117 First Street SE. In 1956, the organization moved again because Weber’s office next to the Falls Theatre was too small. The new location, which opened November 7, 1956, was at the corner of First Avenue and First Street SE, Little Falls.
With the 1956 move came a report on Little Falls Federal’s assets, which totaled $3,450,000. The association “[had] enabled approximately 2,100 families to purchase, construct or remodel their homes.” (3)
A few years later, on November 16, 1959, Little Falls Federal relocated again, to the brick building on the southwest corner of Bank Square newly vacated by American National Bank. Its assets as of October 31, 1959, were at $5.6 million. By 1964, the association had over $8.2 million in assets, with an “all-time high” savings of over $7 million. (4) The upward trend in assets continued into the following year, with over $9.6 million in assets reported. (5)
In 1973, with assets of close to $20 million, Little Falls Federal moved into a brand-new modern building designed by Minneapolis architects Dykins-Handford, Inc., at 35 East Broadway, across from the post office.
The association’s assets continued to rise even after its name changed to Community Federal Savings & Loan in mid-1977. The new name was meant to reflect the organization’s expanding operations, which included two new branch offices in Onamia and Milaca. (6) By the end of that year, assets had reached over $38 million. (7)
Community Federal continued to do well through the following couple of decades, with assets at $68.7 million as of June 30, 1999, and $81.7 million as of December 31, 2004, according to public disclosure documents filed with the OCC.
On June 23, 2006, the association filed a certificate of assumed name with the Minnesota Secretary of State’s Office with a slight change. It was now known as “Community Federal Savings & Loan Association, a division of Home Savings of America,” with the name holder being listed as Home Savings of America and the address as 35 East Broadway, Little Falls. A Community Federal advertisement that appeared in the same issue of the Morrison County Record as its required assumed name announcement shows that it had not yet adopted the Home Savings name. (8) This change in ownership appears to have been kept fairly quiet for a couple of years, until Home Savings of America switched out the Community Federal signs at the building in March 2008. (9)
An online report from Institutional Risk Analytics showing a Failed Bank History Report for Home Savings indicates that the bank was well capitalized until March 2010. By June 2010 it was only adequately capitalized. That month the OCC sent Home Savings an “Order to Cease and Desist,” telling the association it must “cease and desist from any action (alone or with others) for or toward, causing, bringing about, participating in, counseling, or aiding and abetting the unsafe or unsound practices that resulted in the Association operating with: (a) an excessive level of adversely classified and delinquent loans, (b) an inadequate level of capital protection for the volume, type and quality of assets held by the Association, and (c) inadequate earnings to fund growth and augment capital as described in the [Office of Thrift Supervision] Report of Examination of the Association dated October 19, 2009 (2009 ROE).” (10)
One year later, in June 2011, it was undercapitalized and by September 2011, it was considered a failed bank. The OCC closed the bank and the FDIC moved in to take it over in February 2012, causing quite the stir in Little Falls.
But what of those California branches of Home Savings? The three, located in Walnut Creek, Laguna Hills and Seal Beach, closed the same day as the Little Falls bank because the Little Falls location was considered the headquarters for Home Savings. Aside from the lack of capital, another reason the FDIC had such a problem finding a buyer for Home Savings was because its banks were so far away from one other. (11)
While the Minnesota/California relationship bears more investigation (several of the senior executives of Home Savings in Little Falls had prior ties to California banks), the official Audit Report of the Office of Inspector General, Department of the Treasury states that “the primary cause of Home Savings’ failure was its pursuit of an aggressive growth strategy, featuring option adjustable rate mortgages (ARM), without prudent concentration risk management practices.” The report further points out that there were “significant concentrations of higher-risk option ARMs secured by one-to-four family homes in California,” which led to an increased foreclosure rate in the state during the economic crisis, thus leading to the depletion of Home Savings’ assets and its failure. (12)
And a once-solid institution in Little Falls died a dramatic death after over 77 years of service to the community.
(1) Press Release from Comptroller of the Currency, U.S. Department of the Treasury, February 24, 2012)
(2) Little Falls Daily Transcript (LFDT), May 8, 1934
(3) LFDT, Nov. 7, 1956
(4) LFDT, Jan. 17, 1964
(5) LFDT, Jan. 20, 1966
(6) LFDT, July 6, 1977
(7) LFDT, Jan. 20, 1978
(8) Morrison County Record, Feb. 5, 2006
(9) “A Small Observation,” Fish Wrap, March 20, 2008, http://fishwrap.wordpress.com/2008/03/20/a-small-observation/
(10) United States of America Before the Office of Thrift Supervision, In the Matter of Home Savings of America, Little Falls, Minnesota, OTS Docket No. 03052, Order to Cease and Desist, OCC, June 2, 2010
(11) “Little Falls lender closed with no buyer in the wings,” StarTribune, February 24, 2012
(12) Audit Report, Office of Inspector General, Department of the Treasury, OIG-12-056, Safety and Soundness: Failed Bank Review of Home Savings of America, Little Falls, Minnesota, June 18, 2012
Other Sources Used:
LFDT, May 8, 1934
Meeting Minutes, Little Falls Federal Savings & Loan, July 12, 1934
LFDT, July 25, 1956
LFDT, Nov. 7, 1956
Institutional Risk Analytics – Failed Bank Forensics, Home Savings of America as of December 2011, http://us1.irabankratings.com/pub/failedbank.asp?cert=29178, accessed 10/16/2012
-By Mary Warner
This article first appeared in the Morrison County Historical Society newsletter, Volume 25, Number 3, 2012.