Luana Savings Bank seeks to set record straight at BOS meeting

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By Willis Patenaude, Times-Register


A recent Clayton County Board of Supervisors meeting was the setting for a presentation from Luana Savings Bank (LSB) President David Schultz and Administrative Secretary Sarah Schultz Freilinger in an effort to provide information and objective facts, educate about current bank financials and dispel some of the rumors that have been swirling since an article about the bank’s practices first appeared in the Des Moines Register. 


At the heart of the issue is the ongoing legal issue surrounding LSB as a result of the FDIC’s charge that the bank is engaged in unsafe and unsound banking practices and needs to be restrained, but according to Schultz, LSB is the “largest, strongest and cleanest bank in the county.” 


However, this assertion did not stop Clayton County Treasurer Linda Zuercher from removing $1.4 million from LSB when the FDIC issued its notice of charges and of hearing. It’s a position Zuercher said will be revisited only after the case is resolved. 


At the meeting, Schultz questioned why the county was not putting its money into Luana, citing the lack of risk involved since public funds are at zero risk. 


In a separate interview, Freilinger stated, “LSB wants to bring to attention that taxpayers of Clayton County are losing up to $100,000 per year in interest income by not having county funds placed at the higher-interest-bearing accounts. Taxpayers should know, and have the right to know, the low rates of interest being paid by Clayton County banks for public funds. It is disgraceful of banks taking advantage of Clayton County when, in reality, Clayton County banks should be paying a premium for large-scale, million dollar deposits, which LSB is offering. Additionally, the Clayton County Treasurer acknowledged there is zero risk to public funds.”


Regarding the lack of risk, Freilinger noted there are systems in place that prevent public funds from risk in an effort “to provide calm in case there was a national crisis or a systemic shock to the economy. These guarantees provide stability and can curb panic in financial markets. It is relevant because counties such as Clayton County have deposits at multiple banks paying low returns, rather than utilizing the highest paying banks.”


Another part of the meeting was to “counter all the crap” LSB said it has had to deal with, specifically as it pertains to the widespread belief that FDIC regulators issued a court ordered cease-and-desist order to LSB. Even Zuercher inquired about it at the meeting, but Schultz immediately dismissed the issue as a “falsehood,” citing there is no cease-and-desist order in effect and the bank simply has a hearing set for some time in April 2022 to discuss the matter, which Schultz claimed is based on a “disagreement with the FDIC.” 


Schultz also noted the lack of urgency from the FDIC in setting the hearing date months from now as further proof that LSB is doing nothing wrong and engages in safe banking practices. 


On the issue of the cease-and-desist order, Schultz is accurate, as the court documents do not contain an active cease-and-desist order and one has never been in effect. The court filings only contain a cease-and-desist draft proposal for what the FDIC is seeking should they prevail during the hearing. 


The disagreement between LSB and the FDIC revolves around the bank’s use of wholesale funding, which, according to the FDIC court filing, makes the bank sensitive to market risks. The court filing also stated the use of wholesale funding, which the FDIC claimed is “excessive,” has also increased the bank’s risk profile.


“The Bank’s risk profile has increased due to its reliance on wholesale funding, interest rate risk exposure and aggressive loan growth. The Bank’s loan portfolio has become more focused on large lending relationships and CRE credits. Compared to its traditional small lending relationships and agricultural credits, these credit types present higher levels of inherent risk and are increasingly underwritten in exception to Bank policy and without an adequate loan risk identification program,” the filing said.


Schultz provided facts contrary to the FDIC claims, stating that LSB has 37 times less non-performing loans compared to other Clayton County banks. And not only does LSB have a pristine loan portfolio compared to Iowa banks, noted Schultz, it also ranks among the best in the country—a statistic LSB said proves the safety, soundness and great underwriting of the bank and dispels claims by government officials.


Schultz also maintained the use of wholesale funding is legal and no laws, rules or regulations prevent the bank from utilizing them. He affirmed the bank has been using wholesale funding as an option for almost 30 years, even stating it is a “superior financial model” and other banks operate this way. 


But according to the FDIC filings, “The Bank’s capital does not provide adequate support for management’s market risk strategy of funding long-term, fixed rate loans with short- and medium-term wholesale sources [and] the Bank’s poor control over interest rate risk has led to a declining Net Interest Margin.” 


Both Schultz and Freilinger were questioned in a separate interview about the use of wholesale funding, what other banks utilize them to this degree and the apparent risk involved, but provided no further comment other than that “the capital claim by the FDIC is grossly inaccurate, as Luana Savings Bank’s capital levels are extremely strong and rank well for our peer group on a national level 


While LSB didn’t come right out and state the purpose of the meeting was to get Clayton County to reinvest with LSB, they argued that spreading the county’s money around between separate banks was not as viable as simply putting it all into one bank. In this case, according to Schultz, the best option would be LSB. 


This idea of putting all the money into one bank was questioned by Clayton County Auditor Jennifer Garms at the meeting, when she asked Schultz, “In your opinion, would you think it would be in the best interest of the treasurer to deposit all of the money in one bank?” 


“In this day and age, with competition, you bet. It would be in everyone’s best interest to get the maximum returns because other counties are doing that,” Schultz said. 


“I think it’s fair to say it’s more common to see in some of these rural communities, probably, this kind of an outdated method of spreading the money around out of fairness and niceties…but what we see in the bigger communities is the competition, put your money where they’re going to pay you the highest rate of return,” Freilinger added. 


Schultz further commented, “competition is at everyone’s finger tips today. You know what you can get out there, and Clayton County’s approach of placing funds in county banks is antiquated.” 


However, on this point that the idea of spreading money around is outdated, Freilinger clarified that “not asking banks to compete for money is outdated or antiquated. If a county does not bid money out, they will get low returns as is happening in Clayton County…using this bidding method, at the very least, the top two or three bidding banks would be paying much more than what Clayton County is currently receiving today.”


While LSB continues its pursuit of getting the “objective facts” out to the public with the FDIC hearing hovering overhead, Schultz stated at the meeting that everything at LSB is “business as usual” and questioned where anyone could look at LSB’s financials and come to the conclusions reached by the FDIC. 


Schultz was adamant that “nobody has to feel they’re at risk and [people] should take advantage of what they have to offer.” 


Freilinger noted “a lot of the information that was put out there, that simply, people don’t understand.” She added, “it was very clear that the calls we dealt with, people simply did not understand what they were reading.” 


As the FDIC case proceeds, and amid what Schultz declared to the Des Moines Register were “manufactured” accusations, LSB made a point that the bank has not suffered at all. The bank doesn’t believe the case will ever make it to the hearing in April 2022 and feels LSB will be vindicated in the process.

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