If there's ever been a bank that needed a turnaround, Industry Bancshares in Texas is it.
The company, which runs six separate rural banks in the Lone Star State, got into a deep hole after a sharp rise in interest rates tanked the value of its assets. A much needed lifeline finally arrived this week: a planned capital infusion of $195 million.
The cash influx still needs regulatory approval, and analysts say a turnaround won't be easy. But it's a massive step in the right direction for a bank that, at least on paper, owes about $150 million more than it's currently worth.
Helping engineer the $5.2 billion-asset bank's comeback attempt is Carl Chaney, the former CEO of the Mississippi-based Hancock Whitney. The veteran banker helped Hancock Whitney become a regional powerhouse and has more recently been brought in to help fix rocky institutions.
"I've bought a lot of troubled banks in my past, and I've bought a lot of healthy banks," Chaney said. "This, I have to say, is one of the most unique opportunities that I've ever come across."
Part of the appeal is that the bank's headquarters in Industry, Texas, is in the middle of the fast-growing "Texas Triangle." It's a relatively short drive to Houston, Austin and San Antonio, plus a lengthier journey north to Dallas, where "Y'all Street" has welcomed several major banks of late.
The region's booming economy would seemingly present opportunities to deploy depositors' cash into loans. But Industry has been more of a so-called bond bank, earning interest on purchases it makes in the bond market, rather than making its money on interest from loans.
The bank had $1.2 billion of loans at the end of June, compared with some $3 billion of bond holdings. Its bonds, mostly consisting of those backed by states or municipalities, are likely to be repaid, but they became a poor investment when interest rates rose in 2022.
Higher rates mean investors can be paid more for any new bonds that cities issue to finance infrastructure projects. The owners of older bonds suffer, since they are forced to accept a lower price if they sell their low-paying bonds.
'Epically bad' risk management
The problems at Industry are compounded by the fact that the bank plowed most of its cash into bonds that last at least five years. Rather than expiring quickly and letting Industry start fresh, the bank is saddled with bonds that will pay little interest for years.
"This is yet another example of epically bad interest rate risk management in the banking industry," said Todd Baker, managing principal at Broadmoor Consulting and a lecturer at Columbia University.
An American Banker analysis flagged Industry as
A couple of weeks later, a dispute between Industry and the Office of the Comptroller of the Currency, which oversees three Industry subsidiaries,
"This action by the OCC is an unfortunate example of regulatory overreach," the bank said in January. It planned to have an administrative judge review its case.
Chaney said Tuesday that the matter was put on hold but declined to comment further. The OCC also declined to comment.
The $195 million capital infusion, led by a bank holding company called CSBH, would give Industry more wiggle room to sell some of its bonds without suffering catastrophic losses. While those sales would be painful, Industry would be able to stash the cash it gets from the sales at the Federal Reserve, where it should be able to earn an interest rate of over 5% without taking any risk.
"Investing all that liquidity in just overnight funds will be a significant increase in earnings for the institution," said Chaney, who joined the bank as a consultant in February and is now its executive chairman.
The bank plans to gradually rid itself of about $1 billion of bonds, or a third of its portfolio, and will do so "very methodically and very judiciously," Chaney said.
The Fed seems poised to start cutting interest rates next month, and selling too soon could mean Industry doesn't reap the benefits of slightly lower interest rates. Just as sharply rising rates were bad for its bond portfolio, lower rates should help Industry recover some of its losses.
'Could be a great turnaround story'
The plan is to eventually use that cash for loan opportunities in Industry's local communities, but that's "not done overnight," Chaney said.
Leading the loan-growth efforts will be Brian Hobart, who was installed as Industry's CEO as part of a leadership overhaul earlier this year. Hobart is the former vice chairman and chief lending officer at Independent Bank in the Dallas area.
One challenge is that banks across the country are finding it harder to make loans right now, since high interest rates and an uncertain environment have made businesses a little more cautious.
But the new management team's experience will help Industry go after loan opportunities as they pop up, said Paul Davis, a consultant and founder of
"This could be a great turnaround story, but it's going to take some time before we know how it's going to play out," Davis said.
It helps that Chaney has built a reputation as someone who's "not intimidated by a challenging turnaround project," Davis said. Chaney was part of the
A last-ditch attempt to save First NBC Bank in New Orleans was less successful. The bank failed shortly after Chaney came on board, and its former CEO was
'Very powerful statement'
The lead investor in the Industry deal, CSBH,
Industry runs six banks in Texas: Bank of Brenham, Citizens State Bank, Fayetteville Bank, First National Bank of Shiner, First National Bank of Bellville and Industry State Bank.
The deal would require approval from the Fed, which oversees CSBH as a bank holding company. Executives at the firm have had preliminary discussions with the Fed about the transaction, Chaney said.
Industry did not disclose specific terms of the deal, including how big of a blow its existing shareholders took. Despite the hit on their investment, current shareholders and local community members kicked in more than $40 million to help recapitalize the bank, according to Chaney.
Chaney said he wanted to turn to the community before floating the deal to a broader pool of institutional investors. The response represents a "very powerful statement" that even shareholders who took a hit on their investments see the opportunity for brighter days ahead, Chaney said.
The local money was a "real eye opener," showing how much the community values Industry's banks, he said.
"The local communities have just rallied around these institutions and have really supported this effort," Chaney said, noting that depositors have also kept their money at the bank.
