Deposit-Insurance Dropouts Alone But Happy

They get lots of calls from bankers who say they wish they could do the same, but Oklahoma's two deposit-insurance dropouts appear destined to remain curiosities, not trendsetters.

Few other states allow banks or thrifts to forgo federal deposit insurance coverage. And so far, according to the FDIC, no one in any state has made a move to follow in the footsteps of Burton L. Mann and Alvin C. Harrell.

Mr. Mann, president of Okmulgee Savings and Loan Association, was the first to drop deposit insurance. His tiny state-chartered mutual, located in the small eastern Oklahoma town of Okmulgee, left the FDIC in 1993 because of frustrations with the Community Reinvestment Act and other federal rules.

Now, two years later, "We're still rocking along," Mr. Mann said.

After a one-third decline in deposits during the first year, Okmulgee Savings has leveled off at about $2.3 million in deposits and $3.3 million in assets. But that's only about half the thrift's pre-S&L-crisis size, and Mr. Mann doesn't see it getting much bigger in a town plagued by high unemployment and declining population.

At Oklahoma City's Home Savings and Loan Association, which followed in Okmulgee's footsteps last year, the future looks rosier.

That's largely because Mr. Harrell, chairman and CEO of the state- chartered thrift owned primarily by his family, decided to leave the FDIC, not out of frustration so much as a sense of opportunity.

"Now we are in a market niche by ourself," said Mr. Harrell, a part-time banker who teaches business and consumer law at Oklahoma City University. "There is really not an institution that I'm aware of that offers the same combination of safety and soundness with high interest that we offer."

The interest rates Home Savings offers certainly are high: a 6.76% annual percentage yield on six-month certificates of deposit of $500 or more, with the yield going up to 7.02% for one-year CDs, and 7.82% for four-year CDs. Each of those rates is about 100 basis points more than any insured institution in the country is paying.

As for safety, Mr. Harrell said the thrift has a Tier 1 capital ratio of 30% and a risk-based capital ratio of a mind-boggling 160%.

Paul R. Foster, general counsel with the Oklahoma Banking Department, which oversees Home Savings and Okmulgee, said neither is "under any kind of supervision as far as I know." He added, "I think their financial statements will tell you everything you need to know."

Mr. Harrell said Home Savings is able to combine conservative management with high yields because it saves so much money by being free of deposit insurance premiums and federal regulation.

How much money? Up to $200,000 this year, Mr. Harrell said. "Annual net income runs at $100,000 or less, so that is a substantial savings," he added.

Home Savings, which was a $23 million-asset institution in 1990 but had contracted to $15 million by last year, shrank another 30% after it dropped federal insurance. But with ads running weekly in The Sunday Oklahoman newspaper touting its high rates and including the disclaimer "deposits not insured by any government agency," it has begun slowly luring customers.

Not that everyone in the Oklahoma City banking community has noticed. "I had forgotten all about (Home) until you just called me," said Ron Mosier, president and CEO of $65 million-asset Will Rogers Bank.

Home Savings' assets, Mr. Harrell said, now add up to about $11.5 million, with deposits of $8 million. About 70% of the assets are invested in U.S. Treasury securities, with the rest in mortgage, home equity, and car loans.

Such a low loan-to-asset ratio probably wouldn't pass muster under new community reinvestment rules, Mr. Harrell said - one more reason he's glad not to be under federal regulation anymore.

"We are so pleased with our situation that we would not be interested in going back in," he said. "Just to be relieved of the uncertainty about what's going to happen next in Washington, just to be relieved of the general intrusiveness of the federal regulatory system, regardless of the financial concerns, is just wonderful."

In Okmulgee, Mr. Mann reads Home Savings' newspaper ads and admires Mr. Harrell's resourcefulness. "We're kindred souls," he said.

But he said he doesn't see his thrift following Home Savings' business strategy. "Our market is very soft here and has been for years," he said. "We did not go out aggressively after deposits. ... We have paid just a little more than our local competitors, but they don't feel the competition."

Okmulgee Savings is extremely healthy - with Tier 1 capital of 31% and risk-based capital of 288% when it was last audited in September, Mr. Mann said - but is simply too small to do much. In 1985, in fact, it stopped making loans - the due diligence required on them was too expensive. Since then, virtually all its assets have been in government securities.

That conservative investment strategy may have helped Okmulgee Savings survive the savings and loan crisis as an independent, liquid institution - one of only a handful of Oklahoma S&Ls to do so - but it did not sit well with the Office of Thrift Supervision community reinvestment examiner who visited the thrift in 1991, Mr. Mann said.

"We don't feel that we're racist beasts," he said. "We had done a lot to help black families get into houses with very little down ... and here comes this little college girl walking in and saying we're in substantial noncompliance with the CRA."

He added, "We got extremely high grades on safety and soundness, but we got an F-minus on CRA." And that failing grade, he said, led to his decision to drop out.

So what does Okmulgee's future hold? "When this whole thing settles down, the cost of SAIF (Savings Association Insurance Fund) settles down and they resolve this CRA thing, then we thought maybe we'd resurface" as an insured institution, said Mr. Mann, who is 69. "It will be different people, because I'm very elderly."

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