The Federal Deposit Insurance Corporation (FDIC) has taken action to shut down Citizens Bank in Sac City, Iowa, after uncovering significant loan losses on the bank's balance sheet. The closure of Citizens Bank marks the first bank failure in Iowa since 2011 and brings the total number of bank failures in the U.S. to five this year.

Iowa Trust & Savings Bank has assumed all deposits of Citizens Bank to ensure the protection of depositors. The two physical locations of Citizens Bank will reopen under the name Iowa Trust & Savings Bank starting on Monday.

Established in 1929, Citizens Bank had approximately $66 million in total assets and $59 million in total deposits as of September 2023, according to the Iowa Division of Banking. During a joint examination, regulators identified significant loan losses that had not previously been disclosed by the bank, leading to its declaration of insolvency.

The bank's loan losses were attributed to a concentration of out-of-territory and out-of-state loans to a specific industry. While the specific loans that caused these losses have not been disclosed by regulators, the consequences of this situation highlight the challenges faced by the banking industry in 2023.

The entire banking industry has experienced difficulties due to underwater bond portfolios throughout this year. These challenges were triggered by a series of aggressive interest rate hikes implemented by the Federal Reserve. The extent of the problem became evident with the collapse of Silicon Valley Bank earlier this year, which announced a staggering $1.8 billion loss from selling a portion of its underwater bond portfolio, leading to a run on the bank in March.

According to a recent report by Moody's, the banking industry faces an estimated $650 billion in unrealized losses that are not currently marked at market value. Such losses further emphasize the need for thorough examination and oversight by regulators to identify potential risks and ensure the stability of financial institutions.

The FDIC's swift action to shut down Citizens Bank and secure the assumption of deposits by Iowa Trust & Savings Bank demonstrates the regulatory agency's commitment to safeguarding depositors' funds and maintaining the stability of the financial system. It serves as a reminder of the importance of prudent lending practices and risk management in the banking sector to prevent similar incidents in the future.