WASHINGTON — The Federal Deposit Insurance Corp.'s Office of Inspector General found lax lending and poor risk management led to the downfall of Citizens Bank in Sac City, Iowa, in November 2023 and its $14.8 million hit to the Deposit Insurance Fund.
As early as 2014, the report says the $65 million-asset bank — 100%-owned by the family of Thomas Lange, the bank's chairman and president — made ill-informed commercial loans to trucking companies without adequate risk mitigation, board oversight or business expertise. Those loans were heavily strained as supply-chain snags during the pandemic imposed increased fuel, insurance and repair costs, making it increasingly hard for borrowers to repay.
"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," the OIG wrote. "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."
Citizens was the
According to the OIG, regulators caught wind of trouble at Citizens around the same time as the supply-chain issues began to emerge. At that time, management of the bank ramped up trucking loans outside of its primary trade area, and its corresponding poor credit underwriting and administrative weaknesses raised red flags for FDIC examiners.
From 2020 onward, the FDIC took a string of regulatory actions, including filing a "matters requiring board attention" report in a March 2020 examination. Both the FDIC and the Iowa state bank regulator identified credit administration and loan underwriting deficiencies in their respective April 2021 and July 2022 examination reports. The regulators also found the bank had violated Iowa's ban on state banks' granting loans and extensions of credit that exceed 15% of the firm's aggregate capital to a single borrower.
In May 2023, a joint review by the FDIC and Iowa Division of Banking revealed serious issues at Citizens, leading to a downgrade in its supervisory rating. Despite a consent order issued in August 2023, the bank's financial condition deteriorated further by October. Consequently, the FDIC declared Citizens "critically undercapitalized" and took over as receiver on Nov. 3, 2023.
The report said Citizens' impact on the Deposit Insurance Fund was average relative to losses over the last five years, and thus not sufficient to warrant a more comprehensive review by the agency's watchdog.
The FDIC OIG is mandated by law to conduct a preliminary investigation of a state bank regulator's stated cause for a failure when the DIF suffers a loss of less than $50 million and to decide whether further review is needed. Losses above that threshold automatically receive a full investigation.
The OIG, however, said Thomas Lange had a multitude of conflicts of interest in loans administered by the bank, which it says have been communicated to the appropriate authorities. These conflicts were determined not to be contributing factors to the bank's failure, which was the main concern of the report.
The OIG also found that the FDIC's supervision itself did not contribute to the failure. In fact, the agency repeatedly pinpointed the problems, issued notices and took steps to address the concerns.
"Ultimately," the OIG wrote, "the bank's inaction to address these supervisory recommendations resulted in its failure."
