Texas Bank Goes Up In Flames Around Accusations of Paper Burning and Fraud, Resulting in a $27M loss for the FDIC and it’s First Bank Closure since 2017

Texas Bank failure, the first in 17 months, is Downplayed by the Banking Industry and Regulators

After a 17-month streak without a bank failure, a small Texas bank was shut down on May 31, 2019.

The one-office Enloe State Bank was seized by Texas banking regulators, and the Federal Deposit Insurance Corp. sold it to Legend Bank.

This failure may have a little more drama than most. The bank was closed “due to insider abuse and fraud by former officers,” according to a statement from Texas Banking Commissioner Charles Cooper.  A local fire department was dispatched to Enloe’s office on May 11, a Saturday night, to respond to a report of papers being lit on fire, which law enforcement officials deemed suspicious, according to news reports.

It became the first U.S. bank to collapse since Washington Federal Bank for Savings in Chicago on Dec. 15, 2017.

The failed Enloe appears to be costly for the FDIC. The Cooper, Texas-based lender had assets of $36.7 million and deposits of $31.3 million, of which just $500,000 exceeded the FDIC coverage limits. But the failure will cost the FDIC insurance fund about $27 million, and Legend is taking just $5.2 million of the dead bank’s assets.

Days earlier the FDIC had noted that its secret “problem list” was down to 59, the lowest number of weak lenders since early 2007. That list of troubled banks peaked at 888 in early 2011. Florida has not seen a bank failure in more than four years. Eleven lenders based in Sarasota, Manatee and Charlotte counties collapsed from 2008 through 2011.

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The nation’s first bank failure in 17 months seems to be an industry outlier and not necessarily a harbinger of more problems to come.

Regulators shuttered Enloe State Bank in Cooper, Texas, late Friday. It was the first bank closing since Washington Federal Bank for Savings in December 2017.

While Legend Bancorp in Bowie, Texas, bought all of the $36.7 million-asset Enloe’s insured deposits, it purchased just 14% of the failed bank’s assets.

The Federal Deposit Insurance Corp. estimated that the failure would cost the Deposit Insurance Fund roughly $27 million, roughly three-fourths of Enloe’s asset size.

Those involved with the failure, along with several industry observers, note that special circumstances were involved.

Regulators had to close the bank “due to insider abuse and fraud by former officers,” Texas Banking Commissioner Charles Cooper said in a press release announcing the failure. And a local fire department went to Enloe’s branch on May 11, a Saturday night, to respond to a report of papers being lit on fire, which law enforcement officials deemed suspicious, according to the Paris News.

Given its size, and the circumstances involved,” Enloe is likely to be a one-off failure,” said bank investor Phil Timyan.

Danny Payne, a bank consultant and a former commissioner of the Texas Department of Savings and Mortgage Lending, agreed that the closing seems to be an isolated case.

“I am impressed with overall bank performance and strong capital positions,” Payne added. “I wouldn’t think we’re seeing the start of a trend of closures. It is easy to get paranoid given what we went through in 2009 through 2011, but I truly believe this is a one-time deal.”

Regulators also cited fraud as a catalyst for the failure of the $166 million-asset Washington Federal.

The Treasury Department’s Office of the Inspector General determined in a material-loss review that Washington Federal’s failure resulted from loan fraud by employees, including CEO John Gembara, who was found dead at an associate’s home shortly before the bank’s closure.

Still, bankers and investors must be vigilant, given how long it has been since the economy has sputtered.

Payne said he is “somewhat concerned” because some economic indicators and other factors are moving in the wrong direction, including rising yields for 10-year Treasury notes.

Timyan said he will start to worry when call reports show a significant increase in loans that are 60 to 120 days past due, which hasn’t happened.

For its part, Legend plans to use the acquisition to expand its operations into northeast Texas. The bank noted in a press release that all of the FDIC-insured deposits are “safe, secure and accessible.”

Legend referred all questions about the failure to the Texas Department of Banking press release.

The FDIC, which retained the remaining assets, will investigate Enloe’s failure, following a procedure for any bank closing, said spokeswoman Julianne Breitbeil.

“We have had other long stretches without a closure, but for nearly every year of FDIC history we’ve always had at least one bank close,” she said.

Credit: American Banker