2024 Journal of Community Bank Case Studies

University of Illinois Springfield Executive Summary

The failures of Silicon Valley Bank and two other large regional banks were caused by poor management practices exposed by the rising interest rate environment. Chief among the causes were long-maturity assets on one side of the balance sheet and concentrations of deposits, especially uninsured deposits, on the other. In this case study, we will look at these failures through the lens of one community bank, INB (formerly Illinois National Bank). We conducted a series of interviews with members of the INB management team to find out how their practices are different from those of the banks that failed, and how they continue to ensure they do not become like those banks. First, unlike SVB, which more than tripled its assets in three years, our financial analysis shows that INB has had consistent, controlled growth over the past five years. They have grown net operating income at a compound annual growth rate of 13.8% and assets at 17%, going from $1.1 billion to $2.1 billion in five years while

maintaining a Tier 1 RBC level of 11.23%. INB has a loan to deposit ratio of 90.2% and maintains a conservative, disciplined approach to asset management by keeping asset maturities short. A loss of book value of long-dated assets due to rising interest rates played a key role in the failures of SVB and First Republic Bank. All three banks that failed over relied on uninsured deposits as a source of funds. To mitigate the risk of runoff associated with uninsured deposits, INB uses the IntraFi network to turn large deposits into fully insured reciprocal deposits. Their use of this service allowed INB to grow deposits in the uncertainty following the bank failures. In short, INB uses a combination of conservative and cutting-edge practices to mitigate risk across all areas of its business.

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