Dive Brief:
The Federal Deposit Insurance Corp.’s Office of the Inspector General reported that “lax lending practices” were primarily responsible for the failure of Citizens Bank, based in Sac City, Iowa, in November.
Since 2014, Citizens Bank has issued commercial loans to trucking companies without adequate risk management, expertise, and board oversight, leading to a situation where, by last June, these loans constituted 43% of the bank’s portfolio.
The bank management’s failure to address flagged concerns by regulators contributed to the bank’s downfall, resulting in an estimated loss of $14.8 million to the Deposit Insurance Fund, which is 23% of the bank’s total assets, as reported.
Dive Insight:
Following significant loan losses, the Iowa Division of Banking closed Citizens Bank and appointed the FDIC as its receiver. Subsequently, Iowa Trust & Savings Bank acquired the bank.
The report emphasized that the failure was mainly due to inadequate oversight of credit administration practices by both the board and management.
The bank’s rising involvement in the commercial trucking sector became problematic as borrowers in that industry faced deteriorating financial conditions, exacerbated by supply chain disruptions and surging costs during the COVID-19 pandemic.
Citizens Bank further complicated its situation by lending additional funds to struggling borrowers through overdrafts and often exceeding the state’s lending limits, without obtaining updated financial information or conducting proper collateral assessments.
Between 2020 and 2023, management increased the volume of trucking loans beyond the bank’s traditional agricultural lending base, which had historically been its primary risk and profit driver. This shift, combined with poor credit underwriting practices, heightened regulatory concerns.
In March 2020, the FDIC recommended that Citizens Bank improve its credit administration policies. However, by January 2023, a memorandum of understanding required the bank to rectify several regulatory issues. Despite this, a later examination revealed that the bank remained “critically deficient” due to management’s inaction in addressing existing concerns.
Ultimately, a consent order was issued in August, mandating the bank to limit overdrafts and restrict lending to high-risk borrowers. However, significant loan losses severely affected the bank’s capital and it failed to meet the requirements set forth in the agreement. Moreover, conflicts of interest were identified in loans managed by the bank’s chairman and president.
The situation underscores the classic pitfalls of poor credit decisions, particularly due to Citizens Bank’s overexposure to one industry and its lending practices beyond familiar geographies. Despite its small size, its failure highlights crucial lessons about credit risk amidst a broader focus on liquidity in the banking sector.
