Dive Brief:

• The Federal Deposit Insurance Corp. has hit three Texas banks owned by Industry Bancshares with consent orders, citing a number of needed corrections, according to the orders released Friday.
• The regulator flagged shortcomings related to the lenders’ capital position, liquidity, staffing and credit risk management, among other things, and ordered the banks to take a list of actions to address the issues.
• The banks cited are Industry, Texas-based Industry State Bank; Fayetteville Bank, based in Fayetteville, Texas; and Citizens State Bank in Buffalo, Texas.

Dive Insight:

Industry Bancshares has about $5 billion in assets across six bank subsidiaries, three of which received FDIC consent orders. 

The bank holding company has struggled, after soaring interest rates crushed the value of its assets, which are heavily composed of bonds, American Banker reported. Significant unrealized losses contributed to Republic First’s woes, as well as Silicon Valley Bank’s last year. It’s expected to be an issue for other lenders, too, who may have to consider a capital raise or a sale.

Industry Bancshares’ shaky standing led it to pursue a capital raise and explore its options. The company received a $195 million capital infusion in August from CSBH, parent company of New Horizon Bank, according to a LinkedIn post. 

With that came the addition of Carl J. Chaney as executive chairman and Brian E. Hobart as CEO. The company told American Banker it planned to sell about $1 billion of bonds, equating to about one-third of its portfolio.   

The banks didn’t admit or deny the charges, the FDIC said. Industry Bancshares fought the Office of the Comptroller of the Currency in January rather than sign public enforcement actions, calling the orders “regulatory overreach,” according to American Banker. 

The OCC had charged Industry’s three other bank subsidiaries – The First National Bank of Shriner, Bank of Brenham and The First National Bank of Bellville – with engaging in unsafe or unsound practices by concentrating their investments in long-term securities, exposing them to “excessive” interest rate risk as they lacked sufficient sources of contingency funding or capital.

Industry planned to seek an administrative judge’s review of the OCC case, but had tabled the matter by the time the capital raise was announced. 

Industry didn’t immediately respond to a request for comment Monday. 

All three banks were ordered to come up with plans to bolster their capital positions, and achieve and maintain a tier 1 leverage capital ratio of at least 10%. The lenders also need to come up with a plan to boost profits. 

Industry State Bank was also ordered to enhance its credit risk practices when it comes to large loan relationships. During the underwriting process, the bank must seek an independent review of sizable relationships, separate from the originating loan officer, “to ensure the accuracy of information” given to the bank’s loan committee and board, the order said.  

In light of Industry Bancshares’ bond issues, all three banks must strengthen interest rate risk management programs, the FDIC said. The lenders also have to assess management and staffing needs, including developing a plan “to recruit and hire any additional or replacement personnel with the requisite ability, experience, and other necessary qualifications.” The lenders also face dividend restrictions. 

When it comes to liquidity stress testing, the boards of all three lenders were directed to “implement Bank-specific scenarios given the unique vulnerabilities posed by the balance sheet,” the order said. 

The banks also must revise their strategic plans, assessing their current financial conditions and market areas, as well as “operating assumptions that form the basis for major projected income and expense components,” according to the orders.

As part of enhancements to their strategic plans, the banks need to establish goals for reducing problem loans and plans for maintaining adequate liquidity, the orders said.

Fayetteville Bank and Citizens State Bank also faced additional direction relating to loan policy and credit administration and were told to employ greater scrutiny around their involvement with certain loans. 

“When purchasing a participation loan, Bank management must perform the same degree of independent credit analysis on the loan as if it were the originator,” the orders for those two banks said. 

At Fayetteville Bank, in particular, the board must ensure purchased loan participations include “accurate cash flow analyses and appropriate administration of construction credits.”

“Construction loans must require third-party inspections before advancing funds and require Certificates of Occupancy or completion percentages,” the order said. 

Fayetteville’s board must establish a threshold when these documents are required, taking into consideration the type, size and risk of the credit relationship, and the bank’s loan policy should be updated to reflect the requirements, the order said.

Fayetteville and its board also must devise an action plan to address problem credits, according to the order.