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

Even though the banks admitted to no wrongdoing in accepting the orders, the companies must nevertheless implement sweeping corrective measures to address supervisory deficiencies in many areas, including capital management, risk credit and liquidity control.

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

Additionally, the order requires the $5.2 billion-asset bank to review its management personnel and develop a strategic plan to strengthen its financial performance and long-term viability.

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

The state bank’s parent company, Industry Bancshares, was seen as one of the companies most vulnerable to interest rate risk when rates began to rise in 2022. At one point, the balance sheet of the company was reportedly underwater by about $150 million, mainly due to losses on its operations. portfolio of securities held until maturity.

The industry’s financial woes have been attributed to what experts describe as “extremely poor” risk management, particularly with regard to its investment strategy. The bank has invested heavily 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 have contributed to a banking crisis early 2023. Although the company agreed to Friday’s FDIC order, Industry Bancshares resisted coercive measures of the Office of the Comptroller of the Currency which he believes could hamper his capital raising efforts.

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

The FDIC notes that the bank will need to develop detailed plans to address these areas, including a capital plan to maintain adequate financial stability, a profit improvement plan, and a management personnel study to ensure the bank has “qualified management”. Additionally, Fayetteville must update its lending policy to include stricter standards for credit evaluation and monitoring of loan participations and construction loans.

The consent order also imposes restrictions on dividends, limits on financial distributions and enhanced controls for managing interest rate and liquidity risks. The Bank of Fayetteville should conduct regular liquidity stress tests and adopt contingency plans to address 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 against Citizens State Bank in 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 play a proactive role in monitoring management’s compliance, establishing a capital plan to achieve a minimum Tier 1 leverage ratio of 10% and stopping dividend distributions without regulatory approval. It also requires a detailed assessment of staff needs and qualifications to ensure staff can perform key tasks effectively.

The order also requires stricter controls on lending policy, liquidity and interest rate risk management to strengthen the company’s financial stability. It requires the bank to adopt an overall profit plan to improve its profits and maintain adequate resources for credit losses. The board should update the strategic plan to address loan pricing, asset/liability management, and problem loan and liquidity goals. Quarterly progress reports are required to confirm compliance, and the bank must notify shareholders of the order, which will remain in effect until regulators consider the deficiencies resolved.

Report in March 2023 found that many community banks, like those involved in the recent consent orders, miscalculated their exposure to interest rate risk after aggressively purchasing bonds at historic lows. As the Federal Reserve sharply raised rates to combat inflation, the value of these bonds fell, leaving many small banks with large unrealized losses.