Local Banking Group Pushes Back Against Express-News Story

All of our institutions are “in a safe and sound condition” Industry Bancshares Spokesman Says

An article by Michael Taylor in the San Antonio Express-News last month raised concerns about a local financial institution, Industry Bancshares, Inc., which owns Fayetteville Bank and five other subsidiaries in this part of Texas.

(Read it online at https:// www.expressnews. com/business/columnists/ michael-taylor/article/industry- bancshares-bonds-negative- net-worth-18363974.php) The bank told the Record last week that they disagree with Taylor’s analysis.

“Industry Bancshares, Inc. and our six chartered banks have capital levels that significantly exceed the required regulatory minimums, are financially strong and well positioned in the current environment,” said a spokesman for Industry Bancshares. “We are in a safe and sound condition, and we continue to serve our customers throughout the communities we operate in Texas.”

The Express article stated that in its quarterly financial report from June, Industry Bancshares has $5.8 billion in assets but has a combined total equity capital of negative $128 million. Generally accepted accounting principles (GAAP) require that Industry Bancshares consider the unrealized losses in the bonds when calculating its GAAP equity which are due to bond holdings that lost value after the Federal Reserve aggressively hiked interest rates.

“It’s important to note, Industry Bancshares and all subsidiary banks are ‘well capitalized’ under the guidelines and regulations used by the banking regulators,” the spokesperson said.

According to Taylor: “Having negative equity means that if all depositors and lenders to the banks wanted their money tomorrow, and if the banks managed to sell all their assets, including their bonds, there wouldn’t be enough money to pay them off. In this case, Industry Bancshares would be short $128 million. At current prices, its bonds lost so much value last year that there isn’t enough to cover depositors and lenders to its banks.”

Regulatory reporting from the second quarter of 2023 with the Federal Deposit Insurance Corporation (FDIC), shows deposits at Fayetteville Bank amount to more than $593 million. Those deposits are backed by assets of $593,312,000. A large portion of those assets, about $417.8 million, are government securities. The FDIC report says about $337.5 million of that amount are state and local bonds.

In the Express article, Taylor noted that previous banking crises across the nation stemmed from poor loan performance. That is not a problem for Industry Bancshares, Taylor said. He described Industry’s loan portfolio as “pristine.”

This year’s high-profile bank failures at First Republic Bank, Silicon Valley Bank and Signature Bank were because the banks did not have the liquidity to meet the significant demands of their depositors.

“Industry Bancshares and its subsidiary banks have the liquidity to meet customer needs,” the spokesperson said. “But as important, Industry Bancshares has a different type of customer than those banks – a generational customer – families that have a trusted banking relationship with the bank for three maybe even four generations.”

“Most banks hold lots of bonds, and most bonds lost money in 2022 when interest rates rose quickly as the Fed used that tool to fight inflation,” Taylor said in the article. “So most banks had losses to report this past year on their bond portfolios.”

The spokesperson stated that Taylor was incorrect and misleading in his statement.

“The bonds lost value, not money, and if held to maturity would be fully redeemable at par, or face value,” the spokesperson said. “Bond ‘losses’are only losses on paper, they do not have to be realized.

“Over the past 30 years, our bond portfolio strategy has enabled us to maintain strong earnings and bolster our capital position,” the spokesman said. “The bond portfolio is comprised of high-quality, performing investments such as U.S. government treasuries and agencies and highly rated Texas municipal securities. The current unrealized losses in our bond portfolio are just that – unrealized. Our high credit quality, highly rated bonds continue to perform as agreed.”

Furthermore, the spokesman pointed to Fayetteville Bank’s Tier 1 leverage capital, another measure of the bank’s financial health, which stands at 11.85 percent as of August. That’s almost double the required minimum set by federal regulators.

“Fayetteville Bank, as all of our institutions are, is in a safe and sound condition,” the spokesman said. “In general, each bank differs from their deposits make up, loan type, and customer area. Fayetteville Bank has Tier 1 Capital level of 11.85% which has continued to increase during this entire rate cycle. Further, liquidity levels are strong and asset quality, including the bond portfolio, is very strong.

“We also have significant levels of on-balance sheet liquidity and contingent sources of liquidity that provide stability to each of the banks, allowing them to meet the needs of their customers,” the spokesman added. “We have increased our Tier 1 leverage capital levels in each of the last 15 years, and in 2023 those levels have continued to increase. As of August 31, 2023, Industry Bancshares, Inc.’s Tier 1 leverage capital is 11.8% and total risk-based capital is 29.9%, which is well above the regulatory definitions of well capitalized.”

The Record asked the spokesman how bond holdings affect the bottom line of Industry Bancshares and Fayetteville Bank, and more generally, if the bank has enough assets to cover deposits.

“Any asset has a yield,” he said. “If the yield is not variable, then it does not adjust as rates move. So, if rates move up then assets are yielding less than the current market rate. If rates decline, then assets are yielding more than the current market rates. This is a daily function of all institutions. The unrealized losses in the bond portfolio are just that – unrealized. We do not need to sell the bonds to meet daily needs. Interest rates are also a function of credit risk; our bonds have almost zero credit risk.”

The FDIC filing from June states that about 68.07 percent of deposits at Fayetteville Bank were covered by FDIC insurance. That leaves almost 32 percent of the bank’s deposits uninsured. The spokesman said federal banking regulations require institutions to list all accounts over $250,000, but it does not take into consideration all of the legal options that are available to ensure funds are fully FDIC insured or other accounts that are secured by an asset. Furthermore, concerned depositors should speak with their banker about the various ways to protect their accounts.

“Our bankers actively work to secure our depositors by styling customers’accounts to be covered by maximum FDIC insurance,” he said. “With six chartered banks we can increase FDIC insurance for customers across our affiliates. In addition, we utilize IntraFi Network, a solution that helps bank depositors access FDIC insurance above $250,000, to ensure our customers have access to maximum FDIC insurance coverage.

“We are prepared to continue to assist our customers in identifying if any additional FDIC insurance coverage is needed to ensure their deposits are fully protected,” he added.