Regulatory Update

May, 2022

Table of Contents

Regulatory Update

Luana Savings Bank is pleased to announce the bank has negotiated terms with the Federal Deposit Insurance Corporation (FDIC) and Iowa Division of Banking (IDOB) (herein referred to as Regulators) to end current litigation and enter into a Consent Order Agreement between all parties. While the bank does not concede to the differences of opinion surrounding the use of brokered deposits and wholesale funding, this meet-in-the-middle approach and decision to end litigation by Luana Savings Bank’s Board of Directors and Senior Management comes with the desire to “get back to banking.” This decision also circumvents the slow-moving wheel of the legal system, saving exorbitant legal and related costs and resources the bank would have further expended through 2023, the estimated timeframe for full legal proceedings to conclude in this matter. Ultimately, litigation has been settled and the scheduled trial has been cancelled. Per normal regulatory procedures, official announcement will come in late June. Customers and the public should expect to see press circulate at that time.

Regulators have conceded that Luana Savings Bank has been and is now positioned to continue as a well-performing bank with superior asset quality. It is highly important for our customers and the public to know the matters of this agreement do not include any issue of risk for depositors’ funds. Additionally, the matters of this agreement will not affect any customer-facing operations and Luana Savings Bank will continue to be a source of strength for both borrowers and depositors throughout Iowa. For decades, Luana Savings Bank has maintained a record of outstanding performance unmatched in the banking industry and this will continue.

The ultimate beneficiaries of the Consent Order Agreement between Luana Savings Bank and Regulators will be the depositors in Iowa. Luana Savings Bank will be competing vigorously for deposits in our market areas. Currently, the bank is offering deposit rates for money market accounts and certificates of deposit well above competing financial institutions. Luana Savings Bank has the financial strength to continue offering these great deposit products while maintaining competitive loan products and still increasing profitability.

Below you will find details regarding litigation background, bank performance, consent agreement terms, and more.

Background

It is important to note this litigation began and is in relation to Luana Savings Bank and its statistics in 2020. In 2020, much like today, Luana Savings Bank was performing among the top of Iowa’s community banks. In good faith, the bank implemented and acted upon a plan to satisfy regulatory requests, within reason, and therefore is an even stronger institution today. However, even with these improvements Regulators would not put an end to this dispute. Luana Savings Bank has been adamant Regulators examine and substantiate any claims of issues with facts and figures, not subjective narratives. Ultimately, these differences in opinion on strategy and management of a bank drove Luana Savings Bank and Regulators to litigation.

There has never been a case like this in banking history. This could seem like an overstatement, but is an undisputed fact. Case law does not exist in the United States relevant to a case such as this, where a bank of Luana Savings Bank’s performance and stature have been questioned this extensively and publicly by Regulators. Any seemingly relevant case law has ultimately been deemed useless, as every other bank in those cases has had substantially lesser performance and significant loan portfolio problems, where Luana Savings Bank does not.

Luana Savings Bank Model & Performance

In full transparency, Luana Savings Bank will provide information comparing itself to the top 20+ community banks in Iowa over 1 billion in asset size in 3 major components of a successful banking institution. The following figures confirm Luana Savings Bank is operating superiorly to the banking industry as a whole. No secret to the financial industry, Luana Savings Bank is a leader in providing low cost loan products and is paying deposit rates far higher compared to almost all financial institutions in Iowa. The chart below compares the top 20+ banks in leverage capital ratios, non-performing loans, charge offs, and efficiency ratios. All figures are as of the most recent 3-31-2022 Quarterly Uniform Bank Performance Report (UBPR), FDIC.gov.

Full comparison chart provided below.

Capital

This is a highly important factor of any successful banking institution because it provides a safety net or cushion in the case of any loan portfolio issues, for example. The larger a bank grows; the more capital is needed. Luana Savings Bank’s capital leverage ratio is strong for its size and in the top half of the top 20+ banks compared below. However, Regulators have set a double standard in insisting Luana Savings Bank operate at a minimum leverage capital ratio of 10% when allowing the majority of the top 20+ banks to operate with less. When all performance measures are considered, this is a punitive request. Ultimately, capital availability is unlimited for Luana Savings Bank, including the amount needed to take Luana Savings Bank to a 3-billion-dollar financial institution. Capital formation is a strength of Luana Savings Bank and always will be.

Loan Portfolio

Simply put, Luana Savings Bank dominates all competitors when it comes to loan administration. This is proven by facts and statistics: the bank’s non-performing loans and charge-offs were “0” as of 3/31/22. These are not only recent statistics, but have trended at near-zero for 30 years. When comparing Luana Savings Bank to these top 20+ banks, the superiority of underwriting and overall performance by the bank’s lending staff and credit analysts is obvious. The chart below shows some of the most telling figures and should be an eye-opener for the public as to why Luana Savings Bank first entered into a dispute with Regulators. It is important to note this chart does not imply problems with loan quality for any of these top 20+ banks, but instead simply demonstrates why Luana Savings Bank strongly disputes the punitive actions of Regulators towards an institution that leads the industry in this measure. Despite near perfect performance in this measure, Luana Savings Bank will continue to enhance its ongoing loan portfolio monitoring efforts.

Efficiency
This key component of a bank’s success demonstrates how well a bank can manage their operating costs. Low operating costs allow a bank to favorably compete for lower-rate loans and higher-rate deposits without affecting the profitability of the institution. In essence, a bank’s operating costs are key to any banking model and has certainly led to Luana Savings Bank’s continued success over the past 30 years. Shown in the charts below as of 3/31/22, Luana Savings Bank is up to 4 times more efficient than these top 20+ banks. Over 30 years ago, Luana Savings Bank modeled the bank accordingly to gain and maintain the best performance in this critical component of efficiency.

Efficiency Ratio = Total Overhead Expense expressed as a percentage of Net Interest Income (TE) plus Non-Interest Income.
Non-Interest Expense = Salaries and employee benefits, expense of premises and fixed assets, and other non-interest expenses divided by average assets.

Funding

Core funding. Non-Core Funding. Wholesale funding. Brokered Deposits. These buzzwords were at the center of the dispute between Luana Savings Bank and Regulators. Essentially, core funding is local deposits from local depositors in a bank’s market areas, such as a $5,000 checking or $500,000 money market account. On the other hand, non-core or wholesale funding comes from across the United States, often by way of 3rd party brokers who can place large blocks of money for groups of investors. This particular funding source is highly efficient because a bank can secure millions in deposits at once. It can additionally help banks meet the lending requirements of market areas that may not have the same deposit capacity, such as the many low-to-moderate income areas and borrowers Luana Savings Bank supports with low-cost loans.

While Regulators throw caution at the largescale use of wholesale funding with no substantiated reasoning, Luana Savings Bank has soundly and successfully utilized this funding source for decades, and therefore strongly opposes this stance which is highly antiquated in the 21st Century.

Ultimately, limiting the use of wholesale funding by community banks hurts the public by decreasing competition in the financial marketplace and continues to give more power to taxpayer subsidized Credit Unions and Farm Credit system, another major financial industry issue at hand. Luana Savings Bank is one of only a few select banks with the ability to compete with these taxpayer subsidized entities. Unfortunately, the Iowa Bankers Association has been silent on the issue of wholesale funding which only contributes to these entities getting stronger and continued actions by Regulators to restrict the use of wholesale funding hinders the ability for banks to compete. Read the ABA’s position on Credit Unions.

Terms of the Consent Agreement

Consent Orders and Enforcement Actions are fairly common and since 2000, have averaged around 800 per year in the banking industry. However, what is unheard of in the banking industry is forming this type of agreement when major components of a current dispute are being satisfied by the financial institution, such is the case with Luana Savings Bank. Nonetheless, Luana Savings Bank will continue working diligently to address and strengthen all areas of the bank related to these matters. Outlined below are the major terms of the agreement:

Board of Directors

Luana Savings Bank’s Board of Directors had two temporary vacancies due to a death and a retirement among long-time members. Regulators requested additional “outside” directors, (not employed or connected to Luana Savings Bank), specifically from the Des Moines market. The bank filled these two vacancies with new Directors from the Des Moines market in 2021. Luana Savings Bank will add one additional “outside” Director in 2022 for a total of 7 Directors.

Capital

Luana Savings Bank is currently over the minimum 10% leverage capital ratio agreed upon between parties. This is an easy ratio to maintain considering the financial markets are ready and willing to supply Luana Savings Bank with additional capital for future growth.

Net Non-Core Funding

Luana Savings Bank will aggressively work to bring the bank into compliance with the 40% Net Non-Core Funding ratio agreed upon between parties. This will be another ratio easily maintained as Luana Savings Bank will continue to diversify its deposits and will be the top competitor in the marketplace for local core deposits. Over the past 12 months Luana Savings Bank has had huge success in securing local core deposits and will continue to do so.

EVE

Luana Savings Bank is well under the maximum -50% EVE ratio agreed upon between parties. EVE stands for Economic Value of Equity. This ratio is intended to help monitor the overall interest rate risk within a bank and identify the value of any banking institution. This misunderstood ratio has a limited effect on the overall performance of a bank.

Management

Regulators have requested Luana Savings Bank do a management study. With Luana Savings Bank’s performance, any suggestion of issues regarding loan administration or at the management level defies all common sense. Luana Savings Bank will oblige by having this study conducted by an independent 3rd party and is confident results will show sound management and strong internal controls are in place.

The President

David Schultz, President of Luana Savings Bank, has been with the bank 32 years. Before joining the bank, David was involved with a well-known family dairy, hog, and cropping operation. Luana Savings Bank hired David in 1990 when the small agricultural bank was around 25 million in assets. Fast forward 3 decades, the bank is around 2 billion in assets today. David no longer farms, but instead has dedicated 32 years to the safe and sound growth of Luana Savings Bank, an organization vital in supporting its communities and its 100 employees. Additionally, David’s three adult children can be found working within bank management day in and day out, contributing to the successful operations of the family-owned bank. While Luana Savings Bank has dramatically changed in size over the years, David’s competitive nature paired with his demands of a clean loan portfolio and efficiency, have remained tried and true principles resulting in the bank’s top rankings among peer banks for decades.

What’s Next?

Banking is a highly regulated industry and Luana Savings Bank takes this regulation very seriously. This is apparent with the transparency and dedication shown by the bank to diligently address, strengthen, and resolve these matters. The public’s confidence in Luana Savings Bank is a high priority for ownership, management, and all staff members who work extremely hard to earn this confidence. Luana Savings Bank sees much room for improvement and modernization within the regulatory process as a whole, including checks and balances concerning what can quickly become the overreach of big government. The bank finds importance in bringing public awareness to these issues when necessary and intends to continue providing informational and educational content to customers and the public regarding bank performance, comparisons, and more.

Looking forward, while the matters of this agreement will not affect customer-facing operations, the public will notice one major change at Luana Savings Bank: the bank will be even more aggressively competing for deposits in all its market areas. As mentioned, depositors in Iowa will be the ultimate beneficiaries as they have the opportunity to earn far higher returns on deposits at Luana Savings Bank than elsewhere. The bank will also continue competing for loans and the bank’s competitive advantages will be seen and felt by customers everywhere. Luana Savings Bank has been and will continue to be transparent with the public, who can rest assured the bank will not waiver in providing high-quality services and competitive products while maintaining outstanding performance, as it has for decades past and will for decades to come.

FAQ

Are my deposits safe at Luana Savings Bank?
Yes! The matters outlined above include absolutely no issue or allegation of risk towards depositors’ funds. Luana Savings Bank is FDIC Insured and public funds have even further protections in place. Furthermore, Luana Savings Bank is a strong institution and Regulators encourage Luana Savings Bank to secure additional core funding from local depositors.

What is a UBPR?
The Uniform Bank Performance Report (UBPR) is an analytical tool created for bank supervisory, examination, and management purposes. In a concise format, it shows the impact of management decisions and economic conditions on a bank’s performance and balance-sheet composition. More Info.

Where can I find a UBPR or performance numbers about any particular banking institution?
The UBPR and many bank performance metrics is public information released on a quarterly basis. These can be found on www.FDIC.gov.

I still have questions. Who can I talk to at Luana Savings Bank?
Customers may email [email protected] or contact the Branch Manager at your local Luana Savings Bank office.

Full Comparison Chart

All figures as of 3-31-2022 Quarterly Uniform Bank Performance Report (UBPR), FDIC.gov.

Charts show Luana Savings Bank operating at superior performance levels compared to these institutions, further suggesting inconsistency within the regulatory process. 

*Northwest Bank and Availa Bank are connected to the current Iowa Superintendent of Banking and the previous Iowa Superintendent of Banking at the Iowa Division of Banking (IDOB).