FDIC cites three Texas banks over risk management, liquidity

NEW YORK — Three Texas banks are facing regulatory scrutiny after the Federal Deposit Insurance Corp. and the Texas Department of Banking Friday issued consent orders against the firms for various risk management deficiencies.

While the banks admitted no wrongdoing by agreeing to the orders, the firms nonetheless must implement sweeping corrective actions to address supervisory shortcomings in multiple areas, including capital management, credit risk and liquidity controls.

Industry State Bank in Texas has been ordered to improve its capital reserves, develop a more comprehensive credit risk framework, enhance interest rate risk management and ensure its liquidity levels are sufficient to meet potential deposit demands. 

Additionally, the order mandates the $5.2 billion-asset bank overhaul its management staff and devise a strategic plan to bolster financial performance and long-term viability. 

The FDIC will require the firm to provide progress reports on compliance, as well as formal notifications to shareholders and the agency to detail progress. The FDIC said further action may be taken if the bank fails to meet these regulatory expectations.

The state bank’s parent company, Industry Bancshares, has been noted as one of those most vulnerable to interest rate risk when rates began climbing in 2022. At one point, the firm’s balance sheet was reportedly roughly $150 million underwater, primarily due to losses on its held-to-maturity securities portfolio. 

Industry’s financial troubles have been attributed to what experts describe as “epically bad” risk management, particularly concerning its investment strategy. The bank heavily invested in long-term bonds with maturities of at least five years, leaving it with a portfolio that generates minimal interest income amid rising interest rates. 

Such miscalculated investments echo risky bets made by institutions like Silicon Valley Bank, which contributed to a banking crisis in early 2023. While the firm consented to Friday’s FDIC order, Industry Bancshares resisted enforcement actions from the Office of the Comptroller of the Currency that it says could hinder its capital-raising efforts. 

The state and federal regulators also issued a consent order against Fayetteville Bank, based in Fayetteville, Texas. The order mandates significant internal improvements across capital management, staffing, risk assessment and strategic planning. 

The FDIC notes the bank shall draft detailed plans to address these areas, including a capital plan to maintain adequate financial stability, a profit improvement plan and a management staffing study to ensure the bank has “qualified management.” Additionally, Fayetteville must update its loan policy to include stricter standards for credit assessment and oversight of loan participations and construction loans.

The consent order also imposes dividend restrictions, limits on financial distributions and enhanced controls for managing interest rate and liquidity risks. Fayetteville Bank must conduct regular liquidity stress tests and adopt contingency plans to handle potential financial challenges, like rapid deposit outflows. To ensure accountability, the bank is also obligated to provide quarterly progress reports detailing its compliance actions. 

A third consent order toward Citizens State Bank in Buffalo, Texas, requires the firm to update its management practices, capital adequacy, risk management and strategic planning. The order mandates that the bank’s board take a proactive role in overseeing management’s compliance, establishing a capital plan to reach a minimum 10% Tier 1 leverage ratio and halting dividend distributions without regulatory approval. It also requires a detailed evaluation of staffing needs and qualifications to ensure that personnel can execute key duties effectively.

The order also requires stricter controls on loan policy, liquidity and interest rate risk management to strengthen the firm’s financial stability. It demands the bank adopt a comprehensive profit plan to improve earnings and maintain adequate resources for credit losses. The board must update the strategic plan to address loan pricing, asset/liability management, and goals for problem loans and liquidity. Quarterly progress reports are required to confirm compliance, and the bank must notify shareholders of the order, which will remain in effect until regulators deem the shortcomings resolved. 

Reporting in March 2023 revealed that many community banks, like the ones involved in the recent consent orders, miscalculated their exposure to interest rate risk after aggressively purchasing bonds at historic lows. As the Federal Reserve raised rates sharply to combat inflation, the value of these bonds plummeted, leaving numerous smaller banks with significant unrealized losses.