Texas bank insider abuse, lax oversight by directors, led to first failure in 18 months; more review needed

Insider abuse and fraud by former officers was the cause of the first failure in nearly 18 months at a small Texas bank earlier this year, according to a report from the federal bank deposit insurer’s inspector general — and a deeper look at the bank’s failure is warranted too, the IG said.

The Federal Deposit Insurance Corp.’s (FDIC) Office of Inspector General (OIG) said $37 million Enloe State Bank of Cooper, Texas, (closed in late May by the Texas Department of Banking [TDB], with the FDIC announced as the receiver) said the bank’s board of directors also failed to establish adequate corporate governance to monitor and control bank management’s activities, “including those of a dominant bank president.”

“The inadequate governance structure resulted in the origination of a large number of irregular loans (allegedly fraudulent and fictitious),” the OIG said in its “Failed Bank Review” report. “The losses associated with these loans depleted Enloe’s capital levels and the Board was unable to obtain additional capital to restore the Bank to health.”

The FBR states that the estimated loss to the FDIC’s Deposit Insurance Fund (DIF) at the time of failure was $27.6 million, or 75% of the Bank’s $37 million in total assets. “According to TDB’s Closing Order, the Enloe Board of Directors resolved to voluntarily close the Bank and place it with TDB for liquidation consistent with state law,” the OIG report states.

The OIG has also recommended an in-depth review of the losses at the bank. The review is warranted, the OIG said, “given the extent of irregular loans and the extraordinarily high estimated loss rate (75%).”

The FBR notes that performing an in-depth review “will provide an opportunity to further evaluate the cause of failure and the FDIC’s supervision of the Bank to determine whether there are any lessons to be learned from this failure,” according to the OIG report. “We plan to complete the in-depth review within 6 months of announcing that engagement.”

Last year was the first since 2006 in which no bank failures were recorded by the deposit insurer (there were also no failures in 2005, according to the FDIC). However, 13 years ago was also the last year before the financial crisis began to ramp up. Within three years (by 2009), the agency reported 168 bank failures – and 157 alone in 2010, the peak of failures during the financial crisis.

In 2017, the last year of reported bank failures, a total of eight banks closed their doors. In the 10-year period 2007-2017, there were 529 insured-institution failures, according to FDIC records. Most of those (468) occurred between 2008-12.

Failed Bank Review, The Enloe State Bank, Cooper, Texas

 

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