When regulators showed up to examine Cooper, Texas-based Enloe State Bank on May 13, they were expecting a routine examination. But two days before, the bank has been the site of a suspicious fire.
According to a May 14 report in The Paris News, a local newspaper, the fire department found burning papers on a conference room table.
Less than three weeks later, the Texas Department of Banking closed Enloe after finding evidence of "insider abuse and fraud by former officers," according to a press release.
"Some of the assets that were reflected on the bank's books, primarily in the loan category — we could not find evidence that those assets existed," Texas Department of Banking Commissioner Charles Cooper said in an interview. "A lot of the materials that we normally look at were damaged in the fire."
The Enloe closure is the most recent example of fraud shutting down a depository. The next most recent bank failure, as well as the most recent credit union placed into conservatorship, were also connected to illegal activity. Still, the rarity of bank failures shows that these have been one-off problems at individual institutions rather than systemic issues, analysts said.
"Insider abuse" can cover a variety of topics, said Scott Polakoff, a former FDIC and Office of Thrift Supervision Chief Operating Officer currently working as a consultant with FinPro. But typically, insider abuse alone does not cause a bank to fail.
"The notion of insider abuses in and of itself doesn't cause the chartering agency to revoke the charter and close the institution," Polakoff said. There must be "something that ultimately negatively impacts capital to the point that the institution's no longer viable," he said.
Enloe was placed into receivership on May 31, with Bowie, Texas-based Legend Bank NA taking over approximately $5.2 million of the failed bank's $36.7 million in assets. Polakoff said acquiring a failed bank's assets could be a "great strategy" for banks looking to acquire.
Legend Bank is assuming less than 15% of Enloe's assets, leaving the FDIC to handle the rest as the receiver. Enloe's failure is the third-highest estimated cost to the regulator as a percentage of the failed bank's assets since 2010, according to S&P Global Market Intelligence data. The Texas Department of Banking is still investigating the bank's assets, Cooper said.
"The acquiring institution's not taking very many of the assets," said Polakoff. "That's one of the reasons the FDIC's anticipated loss ratio is so high for this small bank failure."
For its part, Legend Bank had no concerns about taking on the assets, President and CEO Mickey Faulconer said in an interview. The company will continue to search for acquisitions of other small-town banks, either by bidding for failed institutions or through more traditional M&A strategies, he said.
Fraud has been a part of troubled depositories in the credit union space as well, including one that had more than $3 billion in assets.
New York City-based Municipal CU was placed into conservatorship by the New York Department of Financial Services after its former CEO pleaded guilty to one count of embezzlement on Nov. 20, 2018. The National Credit Union Administration will serve as conservator.
As with Enloe State Bank, credit union experts said fraud alone would not be enough to place the institution into conservatorship.
"Even a major embezzlement is probably not the only reason to appoint a conservator," said Eric Richard, a partner at CU Counsel PLLC and former general counsel at the Credit Union National Association. "It will reflect more concern about systemic problems at the credit union."
Finding a large enough credit union to assume Municipal's assets may be challenging, said Richard. According to S&P Global Market Intelligence data, Municipal is the largest credit union to fail or be conserved since the beginning of 2018 by a margin of almost $2 billion in assets.
With fewer broad systemic issues affecting financial institutions, recent closures have been based on one-off situations due to management issues at the bank. Prior to Enloe, the most recent bank failure was more than a year ago in December 2017, when Chicago-based Washington Federal Bank for Savings failed due to "major fraud."
In both bank and credit union closures, maintaining stability is the main objective for regulators. "They want to maintain public confidence in the institution [and] make sure no one panics," said Richard.
Commissioner Cooper expressed similar sentiments in explaining why his department detailed the specific issues at Enloe in its press release announcing the closure.
"I wanted to specifically talk about the reason for the bank closing ... to indicate to the readers that our community banks in Texas are in great shape," he said. "This bank is an anomaly."
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