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 on Friday issued consent orders against the firms for various risk management deficiencies.

While the banks have admitted no wrongdoing by accepting the orders, the firms must still implement extensive corrective measures to address supervisory deficiencies in several areas, including capital management, credit risk and liquidity controls.

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

In addition, the order requires the $5.2 billion-asset bank to review its management staff and develop a strategic plan to sustain financial performance and long-term viability.

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

The state-owned bank’s parent company, Industry Bancshares, has been noted as one of the most vulnerable to interest rate risk when rates start rising in 2022. At one point, the firm’s balance sheet was about 150 million dollars under water, primarily because of losses held. portfolio of securities to maturity.

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

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

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

The FDIC notes that the bank will develop detailed plans to address these areas, including a capital plan to maintain adequate financial stability, a plan to improve profitability, and a management study to ensure the bank has “qualified management “. In addition, Fayetteville must update its loan policy to include stricter standards for credit evaluation and oversight of loan participations and construction loans.

The consent order also imposes restrictions on dividends, limits on financial distributions and enhanced controls to manage interest rate and liquidity risks. Fayetteville Bank must conduct periodic liquidity stress tests and adopt contingency plans to deal with potential financial challenges such as rapid deposit outflows. To ensure accountability, the bank is also required to provide quarterly progress reports detailing its compliance actions.

A third consent order to Citizens State Bank of Buffalo, Texas requires the company to update its management practices, capital adequacy, risk management and strategic planning. The order requires the bank’s Board of Directors to take a proactive role in overseeing management compliance, establishing a Capital Plan to achieve a minimum 10% Tier 1 leverage level and halting dividend distributions without regulatory approval. It also requires a detailed assessment of staffing needs and qualifications to ensure that staff can perform key tasks effectively.

The order also requires tighter controls on lending policy, liquidity and interest rate risk management to strengthen the firm’s financial stability. It requires the bank to 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 NPL and liquidity targets. Quarterly progress reports are required to confirm compliance, and the bank must notify shareholders of the order, which will remain in place until regulators deem the deficiencies resolved.

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