What’s So Funny About Tightwad’s Money?
One small rural bank's humorous effort to expand succeeds fair and square, only to raise the eyebrows of the regulators tasked to oversee its health.
The 70 or so inhabitants of Tightwad — Tightwadians, as it were — dispute the exact origination of the name of their west-central Missouri village. There is general agreement that it occurred during the early 1900s and had something to do with a store clerk, a postal official, a watermelon, by some accounts a chicken, and 50 cents.
Regardless of its exact genesis, Don Higdon, formerly president of Reading State Bank, a small Kansas-based institution with one office 160 miles west of Tightwad, Mo., saw financial potential in the name. Enough so that Higdon made what in the very traditional and conservative industry of community banking must be called a gamble: In March 2008, he opened a branch in Tightwad and officially renamed the 111-year-old Reading as Tightwad Bank.
A toss of the dice, yes, but the name's comedic and financial potential had been demonstrated a quarter-century earlier.
Tightwad Bank's first incarnation began in 1984. The playful name attracted some media attention. To the surprise of its owners, the bank received requests to open checking accounts from all over the country. At least a few merry pranksters recognized the novelty of cutting checks or handing over a bank card listing The Tightwad Bank as the institution of deposit. Imagine the guffaws billowing from various restaurants, used car dealerships, dentists' offices and so on.
While the niche had value, the first Tightwad bank couldn't thrive at the local level and fell on hard times. It passed through several owners and was eventually purchased by the $10 billion regional bank, UMB Financial, which did little to market its Tightwad branch to spendthrifts countrywide. By the end of 2006, UMB could no longer justify operating the tiny branch for any reason, much less for the sake of novelty accounts. So it folded the office.
After 22 years, there was no more laughter in Tightwad.
Nor has there been much laughing in the community banking industry overall in the years since. Although there is no official definition of "community bank," the financial industry generally considers the $1 billion asset level a rough guide. As of October 2010, there are 7,780 banks in the U.S., 7,116 of which hold $1 billion in assets or below.
Using that measure, 236 community banks have failed since December 2007, the month that the private, nonpartisan National Bureau of Economic Research marks as the beginning of the recession.
Banks beyond the "community bank" asset threshold failed as well, but a good portion of those were close to that fuzzy line and unarguably lacked the economic reach of the largest failures. Fifty-eight $1 billion-plus banks failed since the end of 2007, but 26 of those straddled the community bank fence by being under $2 billion. Twelve were over $5 billion and three over $15 billion.
Seattle-based Wachovia would handily own the title of largest bank failure not only of the recession but of all time had the Federal Deposit Insurance Corporation allowed it to fold. Weighing in at $812 billion at the precipice of its demise, it was deemed too big to fail and was forced to merge with Wells Fargo. By default, the leader to date is Seattle's Washington Mutual, which held $307 billion at the time of its closure. The second place holder is Pasadena, Calif., IndyMac, which went down at $32 billion. Colonial Bank of Montgomery, Ala., is in third with $25 billion.
By comparison, Reading State held $13 million when Higdon hatched the plan to resurrect the Tightwad brand in early 2007. Two percent of all U.S. banks were this size or less at the time. Banks this small are neither known for their risk taking nor their funny bone, but Higdon saw some local potential and felt the novelty niche was under explored. How many local banks, after all, have a line of shirts, hats and coffee mugs?
While community banks change their names for practical reasons much too boring to relay, changing a name partly to profit from an inexpensive joke is simply not done. Higdon says a number of his peers thought he was nuts.
"My own fears were that it would be a flash in the pan," said Higdon, a self-described cheapskate.
Since the name change, the bank's business boomed and its asset size currently sits at $20.3 million. Its portfolio of healthy loans also expanded. The citizens of Tightwad and the surrounding area were happy to have a bank close by again, and Tightwad Bank's investments resulted in new businesses like the Tightwad Cafe and the Tightwad Tavern.
"The town got some local credit to grease the wheel," Higdon said. "Once they trusted us as a bank there to serve them first, we were accepted. These were the people who were going to use the bank regardless of the name."
Tightwad Bank got its own 15 minutes worth of media attention after its initial launch, and the bank's novelty proved it can still bear fruit. Even with no marketing effort, Higdon said the bank has gained depositors from all but 12 U.S. states. Very few rural banks can make such a claim.
The $20.3 million size is still small in the banking world, where household names like JP Morgan Chase and Bank of America, the largest U.S. banks, have assets of $1.57 and $1.52 trillion respectively. Of the 333 banks in Kansas alone, Tightwad ranks above only 38 in terms of assets. But for a bank this size to add $7.3 million to the balance sheet in two years — not to mention doing so during what is now widely considered the worst U.S. economy since the Great Depression — is nothing short of a triumph.
As America's decimated financial sector resurrects, now would be an excellent time to roll out what Higdon calls "Phase 2" of Tightwad's plan: start marketing more broadly and in earnest to capitalize on the novelty. At the dawn of an era that might see saving money return to fashion, the timing seems perfect. But Tightwad Bank's ascension makes the FDIC, its primary regulator, nervous.
Not because it practices risky lending or investing, but because its unconventional branching effort was a bit too successful too quickly.
Enter the Dodd-Frank Wall Street Reform and Consumer Protection Act, which serves as the legislative response to the current recession. President Obama signed the bill into law on July 21.
"After today, regulators will no longer be able to ignore emerging threats to the economy," said Sen. Chris Dodd, D-Conn., a sponsor of the bill, in a release. "And financial operators from the trillion-dollar derivatives market to small time payday lending will no longer be able to operate in the shadows."
Financiers are still making sense of how the new rules, governing a spectrum of banks in which the largest holds over 500,000 times more in assets than the very smallest, will influence their industry over time. Their regulators, however, have made one thing immediately clear: be extremely wary of all bubbles and rapid growth. Tightwad's 50 percent growth in assets starts looking effervescent in that light.
"[Our regulators] just see our numbers and they are scared to death," Higdon said. "Because of our size, the figures exaggerate the impact of the percentage of growth. Seven million is absolutely nothing to most banks. But because no one really knows how the reform will roll out, we are holding back growth for now."
"To be honest, if the name change hadn't happened before the recession, if we had been planning to do this a year ago, I think we might not have done it. There is too much uncertainty right now. Nobody has any idea what the new regulatory bill is going to do. You can read all 2,000-plus pages of the thing, but you're still not going to know much about what the actual effect on us will be down the road."
For good measure, and even farther from the shores of Little Tebo Creek, throw in the Basel Committee on Banking Supervision's updated international capital standards announced in late September. Known as Basel III, these broad guidelines, while not a legally enforced set of international regulations, strongly affect the monetary policies of all G-20 nations, including the U.S., plus that of several other key banking centers. Given its newness, the effect of Basel III is yet to be known.
It should be made clear that Tightwad Bank hasn't received anything like an official regulatory warning. The bank is perfectly sound, and has done all the right things. One might think of it more as friendly advice from above given during a time of uncertainty. It is advice a small bank like Tightwad has little choice but to take as the quakes occurring beneath the world's largest financial institutions continuously shake the globe. Hardy har har.