Banking Crisis Plays Out at America’s Smallest Lenders
Rural community banks are at risk from giant underwater bond portfolios
By Gina Heeb
Industry Bancshares is the parent company of six banks with more than two dozen branches scattered across eastern Texas. / | Photographs by Eli Durst for The Wall Street JournalINDUSTRY, Texas—Doak Hartley usually can’t go to a restaurant, grocery store or even church in town unnoticed.
The chairman of Industry Bancshares gets stopped by customers asking about how to get a loan or where the economy might be headed.
Lately, the questions are more complicated.
Some want to know how many of Industry’s deposits are insured.
(Between two-thirds and three-quarters at each of its banks.)
Others have heard that Industry has a negative net worth and want to know what that means. (The bank owes more money than it has.)
“Banking really is 24/7 if you live in a small community,” says Hartley.
Industry Bancshares, with some $5 billion in assets, is the parent company of six banks with more than two dozen branches scattered across stretches of farms and ranches in eastern Texas.
It is one of the small banks in rural America whose local focus has long been a strength, inspiring years of loyalty from their neighbors to keep money down the street.
Many of these banks are now reckoning with decisions they made when money was abundant and rates were low, crunched by the Federal Reserve’s rapid interest-rate increases.
Banks that are part of Industry Bancshares maintain a local focus.
The company has some $5 billion in assets.Industry is currently more than $75 million underwater because it piled into long-term bonds when rates were low.
Those bonds plunged in value and the bank’s liabilities have been exceeding its assets since soon after the Fed started to hike rates in 2022.
The bank recently said it would pursue a capital raise and explore strategic options.
“Our company will have to change,” Hartley says.
The failure to anticipate how quickly the Fed would raise interest rates has upended banks big and small this year.
Three bigger ones collapsed this spring, but it is community banks such as Industry that have been in a full-blown crisis.
The losses on long-term bonds have unnerved depositors, investors and regulators who have questioned how bankers failed to properly protect themselves from interest-rate risks.
Community banks typically focus on plain-vanilla lending, making a lot of small-dollar loans to businesses and households that fuel local economies.
They also usually stay close to home, serving deeply loyal depositors but limiting their diversity and reach.
In the wake of the pandemic, that business model has proven problematic.
The banks were flooded with deposits.
But loan growth had been slow, so banks turned to parking deposits in Treasurys, mortgage-backed securities and municipal bonds.
While normally considered safe, the market value of those securities fell when interest rates climbed.
That left many banks sitting on billions in paper losses, raising regulator and investor concerns.
A carpentry shop connected to Lone Star Mill and Farm, one of the businesses that work with Industry’s banks.
More than 300 banks had half of their assets in securities in the third quarter, Federal Deposit Insurance Corp. data analyzed by The Wall Street Journal showed.
At roughly 100 of those banks, the total was more than 75%.
Across U.S. banks, 19% of assets were securities at midyear, according to New York Fed data.
Regulators have ramped up scrutiny of banks with high concentrations of securities, noting the role they played in the March failures.
Industry, privately held and based in a town of the same name with a population of fewer than 300, plays the quintessential local banker.
“These are all our customers and shareholders,” Hartley says, gesturing to the businesses and houses that dot a remote highway between two of his banks.
The 65-year-old would have retired this year, but the board asked him to help ride out the crisis.
He honks and waves when he spots an Industry employee on a run on the side of the road.
In 2020 and 2021, Industry’s deposits jumped 23%.
But loan demand fell from already low levels and Industry decided to buy more securities, according to Chief Executive Jim Kruse.
“That’s a risk the bank had to be willing to take during that period of time,” Kruse says.
When they purchased the securities, Industry and others were seeking a bit more income, and longer-term bonds were a way to get it. But when interest rates went up quicker and higher than expected, Industry and many banks started feeling the pinch as the value of those bonds dropped.
Net income at community banks fell 20% in the third quarter.
At Industry, profit plunged 93% to $1.4 million in the third quarter. Net interest income—a measure of the difference between what a bank pays on deposits and earns on loans—makes up 75% of Industry’s revenue and was down by nearly half.
Signs with the names of Bellville High School football players. Industry Bancshares chartered buses so locals could watch the team compete.
First National Bank, an Industry brand, sponsors sports at Bellville High School.The Fed has signaled it is nearing the end of its rate increases, but the pressure on banks will take time to ease.
Banks have different ways of classifying securities on their books that affect whether or not any losses are reflected.
If they sell the securities, though, a loss is recognized.
Industry has already reflected the losses on its books and sold more than $275 million of securities this year in an attempt to bolster liquidity.
A recent run-up in Treasury prices has erased some of its earlier losses.
Industry is also planning to make big changes.
One option would be to merge its six small banks into one or two larger banks.
It could eventually try to shrink its balance sheet, by selling deposits or redirecting them to its wealth-management arm.
Fewer community banks, which are sometimes the only ones around for miles, would ripple through local economies.
When they leave, credit often goes away, as do sponsorships for hometown sports teams and parades.
Industry chartered buses to the Dallas Cowboys’ AT&T Stadium this month so that locals could watch the high-school football team compete in state championships. (It lost.)
At some of the local school stadiums, the bank’s name appears on scoreboards it helped finance.
“We’re out there all the time,” Kruse says, “with deeper relationships than a lot of the regional banks could ever have.”
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