Luana Savings Bank — which advertises itself as one of the fastest-growing and most efficient banks in the state — was recently ordered by federal and state banking regulators to take actions to end what regulators say are unsafe and unsound banking practices.

The Federal Deposit Insurance Corp. and the Iowa superintendent of banking issued a consent order on May 26 against Luana, which last year grew to more than $2 billion in assets, largely by using brokered deposits and other nondeposit sources of funds to drive loan growth.

Based in the northeast Iowa town of Luana, Luana Savings Bank operates five branch locations, including offices in Clive, Norwalk and Polk City, as well as Ossian and New Hampton.

The consent order follows a cease and desist order that the FDIC and the Iowa Division of Banking issued last fall. A joint examination by the agencies “reflects that the Bank has been operating in a less than satisfactory manner with respect to its management, liquidity, sensitivity to market risk, and capital, and as such has been engaged in unsafe and unsound banking practices."

The 12-page consent order issued in late May directs the bank to take a number of corrective actions, including hiring an independent, third-party consultant to develop recommendations and presenting a detailed management plan to regulators detailing a timeline for completion and at least annual follow-up reports.

Luana Savings Bank’s president, David Schultz, had initially indicated he planned to contest the cease and desist order, and an administrative hearing had been scheduled earlier this month in Des Moines before it was preempted by the consent order.

Schultz did not respond to the Business Record’s request for an interview, but on the bank’s website he addressed each of the points in the 12-page order. On that “Regulatory Update” page, Schultz pledged to comply with the FDIC order, but disputed the need for changing how the bank operates.

“With Luana Savings Bank’s performance, any suggestion of issues regarding loan administration or at the management level defies all common sense,” Schultz wrote, referring to the portion of the order requiring a management study. He added: “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 order also prohibits the bank from declaring or paying any dividends or management fees and bonuses for its executive officers without prior written approval, unless it maintains a leverage ratio of at least 10% that indicates it has increased its capital sufficiently.

The high level of non-core deposits as a funding source is among the concerns cited by regulators.

Luana Savings’ “brokered deposits” exceeded $791 million as of Sept. 30, 2020, or 45% of the bank’s total assets, according to the cease and desist order issued by the FDIC. Brokered deposits are defined as deposits that are placed at more than one financial institution on behalf of a third party. Collectively, wholesale funding sources have represented at least 60% of Luana Savings’ total assets since year-end 2016, according to the FDIC order.

Although these sources can be part of a well-managed funding strategy, they may also be problematic when institutions overly rely upon them, according to a 2017 FDIC white paper on liquidity risk. .

On the bank’s website, Schultz wrote that 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.”

With the stipulation, the bank consented, without admitting or denying any charges of unsafe or unsound banking practices or violations of law or regulation, to the terms of the consent order.

Schultz characterized the consent order terms reached with regulators as a compromise.

“While the bank does not concede to the differences of opinion surrounding the use of brokered deposits and wholesale funding,” he wrote, “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.” he wrote.  

In a subsequent website post on June 22, Schultz touted the bank as ranking No. 1 in the state in return on equity, and No. 4 based on pretax return on assets.

“Luana Savings Bank continues to put quality and profitable assets on its books and therefore the bank’s stellar ROE & ROA will continue to shine compared to its peer group,” he wrote. “This allows Luana Savings Bank to continue to pay superior money market and certificate of deposit rates to customers while aggressively competing for quality assets.”

Curtis Hoff, a professor of practice in finance with the Ivy College of Business at Iowa State University, said it’s rare for Iowa banks to receive formal, public cease and desist orders. A search of formal orders on the FDIC website indicated just four formal orders issued in the past 24 months, including Luana’s cease and desist order and the consent order.

Typically, a bank might receive a number of types of informal, nonpublic notifications if there are issues to be addressed, with titles such as Matters Requiring Attention, Memorandums of Understanding and Commitment Letters, he said.

“This has to be an uncomfortable distraction for the staff and directors,” said Hoff, who before instructing at the Ivy College was a banker for 35 years, most recently as president of United Bank & Trust in Marshalltown.

“When you’re a banker, you want to have as many options as possible for funding,” he said. “It seems that [Luana Savings] is tapped out in the nondeposit sources, and that’s what regulators seem to be telling him.”