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This is the second time in recent months that a Texas banking group has come under regulatory scrutiny and the third time this year.
The Fed this week cited Industry Bancshares, a holding company for several regional banks in the state, for a variety of dangerous and unsound business practices. The move follows a similar action by the Federal Deposit Insurance Corporation last month and a January statement from the Office of the Comptroller of the Currency.
Industry Bancshares’ subsidiaries include the state-chartered Industry State Bank, the state-chartered Brenham Bank, the National Association, the First National Bank of Shiner, and the First National Bank of Belleville (the Office of the Comptroller of the Currency). regulated). , Fayetteville Bank and Citizens State Bank are subject to the jurisdiction of the FDIC. The Federal Reserve is responsible for supervising holding companies.
The public enforcement action announced Tuesday morning does not identify any problems within the banking organization, but it does outline a series of improvements that industry bank shares must make in order for the order to be lifted. There is. This includes revising overall risk management practices with a focus on interest rate risk, liquidity and funding, strategy and budgeting, and capital planning.
The order includes a capital preservation clause that prohibits Industry Bancshares from declaring or paying dividends, share repurchases or making other capital distributions without prior regulatory approval.
Industry Bancshares was one of the banks hardest hit by the Fed’s move to push interest rates higher in 2022 and 2023. The rise in short-term interest rates caused the value of long-term bonds to fall, resulting in unrealized losses on banks’ balance sheets. Paper losses put Industry Bancshares in the red by $150 million. The same problems contributed to the failures of Silicon Valley Bank, Signature Bank, First Republic Bank, and many other small and medium-sized banks caught up in subsequent banking stresses.
Industry Bancshares attempted to resolve the issue through a $195 million stock sale agreement with CSBH, Inc., the holding company for New Horizon Bank. As of August, the deal was still awaiting regulatory approval.
Representatives for Industry Bancshares, the Fed and Baker Donelson, the law firm that represented CSBH on the deal, did not immediately respond to requests for comment Tuesday.
In the years leading up to the pandemic, Industry Bancshares focused more on state and municipal debt investments than lending activities. The company’s compiled balance sheet included $3 billion in bonds and $1.2 billion in loans. Although these bonds remain financially sound and likely to be repaid, their fair market values have declined as a result of the Federal Reserve’s monetary policy tightening.
When interest rates rise, new bonds reflect that higher interest rate. This makes older bonds with lower yields less attractive and lowers their trading value.
The Fed began cutting interest rates in September and has signaled further cuts in the coming months, which should eliminate some of the paper losses on bonds and long-term Treasury securities that have crippled banks’ operations in recent years. is.
