For more than half a century, Dwelling House Savings & Loan has built a sound reputation for providing affordable home mortgages to Pittsburgh residents whose credit risk is too high and assets too low to qualify for a conventional bank loan. Now its own financial survival could be at stake.
The federal Office of Thrift Supervision has ordered the venerable savings and loan institution in Pittsburgh's Hill District to raise more capital by the end of June or face the possibility of being sold or shut down.
"We are certainly concerned about the bank's capital position," said Dan Eggan, a spokesman for the Pennsylvania Department of Banking. "When you are faced with a bank that's struggling, you want to take steps to make it healthy again.
"In a worst-case scenario, [Dwelling House] will be shut down," he said. "Nobody is happy when a bank is shut down. If it's possible to turn things around, we'd like to see that happen."
In an era of struggling banks and increasing regulatory action imposed by the federal government, Dwelling House finds its future in jeopardy for a different reason than most.
According to Dwelling House officers, a substantial amount of the institution's reserve capital was electronically stolen by someone who tapped into its account and drained it with fraudulent automated clearing house transactions.
While the total amount funneled out of the institution is unclear, financial records compiled by Bank Tracker show Dwelling House reported a loss of $47,000 in March 2008, which spiraled to a loss of $1.8 million by March 2009.
Robert R. Lavelle, the 93-year-old former CEO of Dwelling House who now serves on its board of directors, said his son -- Robert M. Lavelle -- was terminated earlier this year from his position as the bank president along with Gonzell Phillips, the former controller.
"The controller had direct responsibility for this," Robert R. Lavelle said. "Management wasn't doing what they should have been doing. My son was president at the time and should have been more attentive of what was going on."
Mr. Phillips and Robert M. Lavelle could not be reached for comment.
Daniel Perry, an attorney at the Pittsburgh law firm Tucker Arensberg, said he is representing Dwelling House in recovering the stolen funds.
He said no lawsuit has been filed in the case, but declined further comment. It is unclear if a criminal investigation is underway.
Mr. Lavelle said Dwelling House needs to raise at least $2 million by June 30. The savings and loan has obtained $1 million in new deposits, he said. Mr. Lavelle and other bank officers are actively seeking another $1 million in deposits to rescue the bank.
"Dwelling House has always tried to be the banking institution that tried to correct the ills of society for the poor and people of color," Mr. Lavelle said. "Our purpose is to help poor blacks deprived of banking alternatives."
John Haines, a Mellon Bank retiree, took the helm as CEO of Dwelling House Savings & Loan in mid-January. He said the loss of the money was discovered during an audit conducted at the end of 2008.
Mr. Haines said the fraudulent withdrawals were not made by any Dwelling House employees but by someone outside the bank who recognized its vulnerability. He declined to give more details concerning the person's identity, the time frame over which the withdrawals occurred or the methods used to siphon the money.
"All deposits in Dwelling House are fully insured. There is no concern," Mr. Haines said, referring to the Federal Deposit Insurance Corp. insurance that protects bank customers for up to $250,000 per account.
"Our legal representatives are in the process of recovering our funds through legal channels," Mr. Haines said. "If that proves unsuccessful, we'll pursue other avenues.
"Our bank is not like other banks with toxic loans. This was strictly fraudulent activity that eroded our capital."
Chartered in 1890 as a state mutual bank owned by its depositors, the bank was rescued from failure in 1957 by Robert R. Lavelle. He helped build its capital reserves over the years by taking only a modest salary, which reached a maximum of $15,000. He said he even performed janitorial services himself at one point to limit expenses.
The 119-year-old savings and loan has accumulated $13.4 million in assets. By today's standards, its total assets are just above the bare minimum that would be required to start a new bank.
Dwelling House has historically carried a higher number of delinquent and defaulted mortgages because of the low-income, high-risk population it has served. But the bank also has maintained substantial cash reserves.
Unlike many banks that sell their mortgages for profit, Dwelling House holds all of its mortgages until maturity. Currently, more than 14 percent of the $9.1 million in mortgage loans it owns are past due, according to iBanknet, a company that collects data on financial institutions.
Of the loans that are overdue, the most recent iBanknet figures show $312,000 are more than 30 days overdue, and another $1 million of the loans are more than 90 days past due.
Dwelling House has the highest percentage of bad loans and repossessed assets of all 38 savings and loan institutions based in Pennsylvania.
However, it also has the highest amount of loan loss reserves among thrifts in the state, according to SNL Financial Inc., a firm that tracks the banking industry.
Dwelling House currently has an average of 8.39 percent of its assets in default, while the state average for savings and loan institutions is 0.87, said Eric Fitzwater, a senior analyst at SNL Financial. He noted the statewide average includes Dwelling House's figures.
FDIC records show Dwelling House has total assets of $13.4 million. Its total equity capital, however, dropped from $3.4 million in March 2008 to negative $500,000 in March this year.
"They are in a negative capital position," said Cornelius Hurley, director of Morin Center for Banking and Financial Law in Boston. "This bank has more liabilities than assets."
David Leibowitz, a banking industry attorney for the Lakelaw law firm in Chicago, said unless Dwelling House meets its capital requirement in a hurry, the institution likely will be forced to close.
"A bank with negative capital can't continue," Mr. Leibowitz said. "They would have to have adequate capital to be considered operating under safe and sound banking practices.
"They have to raise capital somehow and based on their performance it will be very difficult. They have got to be concerned there will be regulatory action."
When a banking or savings and loan institution begins to show signs of critical weakness in its capital position, federal regulators begin to take increasingly draconian steps.
The institution's loan policies come under review by auditors, and management is evaluated and possibly replaced. Ultimately a formal order could require the bank to raise more capital by a specific deadline or face being shut down.
The Office of Thrift Supervision has determined Dwelling House is "critically undercapitalized," and has issued a "prompt corrective action directive."
Dwelling House's options under the federal order include pursuing legal avenues to recover its losses related to the improper automated clearing house transactions, securing substantial deposits that can be held as core capital or merging with another financial institution that would result in both institutions being adequately capitalized.
Although a number of banks across the country have buckled as the financial crisis has taken its toll on the industry, bank failures in Pittsburgh have been relatively uncommon.
The only Pittsburgh area bank to fail in recent years is Metropolitan Savings Bank in Lawrenceville, which had $12 million in deposits. It was taken over by the FDIC in 2007 and then sold to Allegheny Valley Bancorp Inc.
Tim Grant can be reached at 412-263-1591 or firstname.lastname@example.org .