Take Five with Jim Tubbs: Bank-run folly

Tubbs CroppedYou’ll have to excuse Lake Ridge Bank CEO Jim Tubbs for essentially saying, “We aren’t them.” The “them,” of course, are Silicon Valley Bank, Signature Bank, and others caught up in mismanagement follies that undermine confidence in the banking system. The big takeaway from our recent Take Five interview with Tubbs is that these failed banks were unique types of financial institutions that were created for specific sectors, which had a concentration risk that should have been better identified by the bank’s own executives as well as bank regulators. “I don’t know of any bank in the state of Wisconsin that has a concentration of that magnitude, so the greater area of the state, from a banking standpoint, is in really solid footing,” he says. That includes Lake Ridge Bank, which was formed from a merger of State Bank of Cross Plains (SBCP) and Monona Bank. The rest of the interview follows.

The bank has a related blog posting to reassure people, but what’s your professional life been like since the news broke about Silicon Valley Bank and later Signature Bank and other big bank failures? There are reports of community banks being drained of their deposits as people ironically move their money to larger banks that are being protected by the powers that be. Are your customers pretty grounded or have you spent most of your time reassuring them?

“We’ve done a very active outreach effort to make sure that our customers realize that Lake Ridge Bank is safe and secure as well as how we are vastly different than the banks that did fail. I’m surprised with the comments with regard to deposits that are leaving. For us, we’ve actually seen a tremendous uptick in deposits where people are putting more money into Lake Ridge Bank. I have met with the FDIC that regulates the entire region and they have echoed that most banks in this area, and that would be mainly Southern Wisconsin into Northern Illinois, have seen the same type of uptick in deposits into the community bank space. So, there hasn’t been this wave of concern that obviously we hear about through many national periodicals.”

I would imagine the merger was especially helpful to you in explaining that the bank is in a strong, well-capitalized position. Is that the case?

“That is the case. Certainly, as we brought Monona Bank and State Bank of Cross Plains together, that certainly brought two already strong community banks into one stronger community bank. That certainly provided additional strength when it comes to what our balance sheet or capital looks like, but it also brought greater strength in our leadership capabilities to be able to reach out to our clients to reassure them that things are safe and sound.”

Regarding the banks that failed, bank regulators were either asleep at the switch or didn’t understand the risk. In the banking industry, was SVB’s business model, which was heavily dependent on interest rates remaining low, generally known or did this come as an industry-wide surprise to folks you’ve talked to?

“The interest rate exposure that Silicon had was well known. The thing that was not well planned was how rapidly these rates increased and what it did to their capital structure. So, the rapidly rising rates is what caused additional problems for Silicon, but the other aspect to it is just the risk profile the bank had, meaning they were highly concentrated into not just one type of business, meaning the tech sector, but they were also highly concentrated into significantly large depositors that managed a significant amount of their deposit base. When some of their depositors started to get spooked, it was significant that the wave occurred when their deposits exited the bank, and they had a liquidity problem. It was concentration in a certain industry and concentration in a customer deposit base.”

The whole scenario sounds like one heck of a marketing coup for community banks. If you could bend the ear of people in Congress, or federal regulators, what would you recommend in the area of rule-making or new regulations to curtail the kinds of business practices that got SVB and others in trouble?

“I would make sure that they feel like these were isolated instances. These were banks that had unique business models, and as we’ve said in the past, the sins of a few should not be on the shoulders of the many and have the rest of us bear the problem. Without question, we need to make sure Congress knows this was a pretty isolated incident and it shouldn’t have a ripple effect through the entire banking industry of having additional regulation imposed on all of us … I don’t know if more regulation would solve this problem as much as more oversight on how the business model of a highly concentrated financial institution can cause risk.”

Another report indicated that SVB would pay off debt by taking out new loans and keep recycling like that rather than pay debt off in a steady way. Is that a practice that should be regulated out of existence? I don’t know too many businesses that are allowed to do that.

“Right, without question that practice certainly could be monitored and managed by the regulators. The other thing that Silicon did was that a significant amount of their excess liquidity was put in long-term securities, hence 10-year, mortgage-backed securities, and that’s what really caused the problem. They took short-term liquidity funds and then put them in long-term investments and when rates rapidly increased, their significant issues were further exposed.”

That $250,000 depositor guarantee has been around seemingly forever. Should it be raised and if so, how high?

“It actually was $100,000 for significant amount of time and I think it was around 2008, the Great Recession time, when they increased it to $250,000. To answer your question, it certainly could be increased so that there is greater assurance to the customer base. The unique thing is that approximately 70% of deposits in Wisconsin banks are already insured under the FDIC umbrella. So, a significant amount, the great majority of that, are already insured. To that point, it could be a vote of confidence for consumers that an increase, at this time, might be warranted, and what does that look like?”