The Nov. 3 failure of Sac City, Iowa-based Citizens Bank stemmed from insufficient risk management and oversight of its commercial trucking loan program, according to a March 22 report from the FDIC Office of the Inspector General.
In 2014, Citizens Bank started making commercial loans to trucking companies “without sufficient risk management practices, adequate expertise and sufficient board oversight,” according to the OIG. The financial condition of those borrowers worsened from 2020-22 as companies were plagued with supply-chain issues and rising costs of repairs, insurance and fuel.
“Citizens Bank compounded these issues by advancing additional funds to problem borrowers through overdrafts, often in excess of the state’s lending limit, and without first obtaining current financial information or conducting proper collateral analysis,” according to the report. “The significant deterioration in the bank’s loan portfolio and operating losses led to a serious depletion of the bank’s capital and stressed its liquidity, ultimately resulting in its failure.”
The report also outlined the steps the FDIC took in examining Citizens Bank in the years leading up to its failure. In 2020, the agency recommended the board address credit risk management shortcomings. Over the next two years, examiners from both the Iowa Department of Banking and FDIC identified repeated deficiencies in loan underwriting and credit administration.
In January 2023, the Citizens Bank board agreed to address those deficiencies, but state and federal regulators downgraded the bank’s overall condition to “critically deficient” in May after finding that its board and management failed to address those shortcomings. By the end of June, Citizens Bank was heavily exposed to commercial trucking loans, including 310 percent of Tier 1 Capital and Allowance for Credit Losses, with trucking loans accounting for 43 percent of the bank’s portfolio.
On Aug. 2, the Iowa Department of Banking and FDIC issued a consent order requiring Citizens Bank to engage a third-party loan consultant to address problem loans. The consultant had the authority to administer and service the bank’s commercial trucking loan portfolio, including the development of a credit risk reduction plan.
Regulators also required Citizens Bank to have 10 percent of total assets be classified as highly liquid. The bank was also ordered to establish contingency funding sources and maintain leverage ratios and capital ratios much higher than standard regulatory minimums. However, Citizens Bank sustained especially heavy loan losses in the first three quarters of last year, including $4.43 million in charge-offs and $4.81 million in loan and lease loss provisions.
The Iowa Division of Banking closed Citizens Bank after finding previously unidentified commercial trucking loan losses and tendered receivership of the bank to the FDIC. Multiple conflicts of interest were identified in loans administered by the bank’s chair and president, according to the FDIC. However, the agency did not find that those “significantly contributed” to the resulting $14.8 million loss to the Deposit Insurance Fund.
Following the failure, the FDIC entered into a purchase and assumption agreement with Emmetsburg-based Iowa Trust & Savings Bank to assume all Citizens Bank loans along with consumer, business and public deposits.