Why did Enloe State Bank fail?

It's been a few years since a bank failed.  Which has been excellent for industry observers, at one point during the crisis it seemed like a half dozen failed each weekend.  In typical fashion the FDIC drops a press release late on Friday when they close a bank.

Banks fail for a myriad of reasons from bad loans to being caught in a liquidity crisis.  Usually it's a combination of both.  A portion of the bank's loan book turns south requiring additional capital at the same time that the bank doesn't have access to capital, or capital is walking out the door.  These confluence of events eventually lead to FDIC receivership.

When a bank fails the FDIC negotiates an agreement with another local bank.  The local bank acquires some or all of the failed bank's deposits along with the choice loans.  Any "bad" loans are either handed over as part of the sale and guaranteed by the FDIC, or handled by the FDIC themselves.

As long time readers know this isn't a bank tracker blog, and I rarely write about failures.  So why this one?

The failure of Enloe State Bank is fascinating, and after a little digging I'm convinced there's a lot more here than meets the eye.

First off in the FDIC's press release they note that the bank had assets of $36m and deposits of $31m.  So then why did Legend Bank (the acquiring bank) only take $5.2m in assets and why did this little bank incur a $27m hit to the FDIC's insurance fund?  Secondly if you Googled the bank news articles from two weeks ago appeared saying that the ATF was investigating a suspicious fire at the bank.  Someone was seen burning papers inside.  Suddenly this is starting to sound like a movie plot and merited further investigation.

I did what any curious person would do, I started to dig into the numbers and wow... something is very off here.

First let me provide a little background.  At CompleteBankData we are building one of the most advanced market analysis, full-stack bank marketing and bank prospecting tools.  We collect data from a variety of sources daily and build out a mosaic showing the current lending market place and opportunity set.  We pull things like deeds, property assessments, mortgage originations, UCC filings, agricultural subsidies and farm information along with credit details and business profiles (revenue, fleet size, number of employees etc).

While the previous paragraph might just seem like a plug for my business, and in a small way it is, I provided it as background for what I found.  Because without knowing what we do you'll be scratching your head wondering how I researched this post.

In general if we pull up a bank with $285m in loans we will be able to find a number very close to that in our database.  There are usually differences due to rounding or other factors, but it's usually very close.  So image my surprise when I started to dig into Enloe State bank and only found a shadow of the number of loans they report.

The bank had $36m in assets, but in the last five years only originated $5.8m in loans.  Prior to that they'd only originated another $3m or so in loans in the prior ten years.

This was head turning at first, but it could make sense.  In Q1 they noted about $5.9m in first lien mortgages, that's right near our $5.8m number.  They also have $3.2m secured by farmland and another $10m in loans to finance agricultural production.  It's the ag loans where things start to get a little fishy.

The bank is classified as an agriculturally focused bank, yet the majority of their loans are for an acre or less.  I found a few on properties that were over 10 acres, which would be considered a very small farm.  A second aspect was that these "farmer" loans were small.  For example one couple on 50 acres borrowed $96k.  Digging into the loan details it appears that the $96k was to finance a residence on the property, not the farm land itself.

Which means I just can't find their $3.2m in farm loans.  Our property data only dates back to 2003, so it's possible the $3.2m in land loans all pre-date this century.  But let me let that hang for a second and let's talk about ag production lending.

If a bank is lending against production there are usually a few ways to identify the activity, primarily though UCC filings.  For example, a bank that is lending for seeds and operating costs they will also secure equipment such as tractors and spreaders.

When I looked at Enloe State Bank's secured financing history back to the 1980s they had a pattern of lending to farmers at least a dozen times a year if not more.  This persisted right up to 2011 and then just dropped off.  There were a few random loans since, but not much of note.

The weird UCC financing pattern might have an explanation, or it might not.  A second factor that turns my head a little is $2.3m in in unsecured loans to individuals.

Let me see if I can piece this together for you.  Legend Bank decided to acquire $5.7m in assets, so loans and possibly Enloe's $2m in held to maturity securities.  Meaning that the only "good" loans were potentially their $5.8m in residential loans that I found, although the number could be potentially less.

So what about all of the farm loans?  This is pure speculation, but I think this might be why someone was burning papers in the bank.  I think it's possible that the bank was lending on "production" that either didn't exist, or was highly inflated.  I know this is speculation, but it's somewhat founded speculation.  I took a list of their borrowers that I knew about with the largest land holding and attempted to cross correlate with farm subsidies or farm income.  It turns out that their largest farmers don't have any identifiable farm income to note.  They've never requested a federal subsidy, and they don't appear in any other sources of farmer income.

And then there's that $2.3m loan.  Was it for a farmer who fell behind? Maybe they had a few bad years? Or was it something else?

The malicious explanation is that the $2.3m in unsecured and production lending were fraudulent and a way to extract money from the bank.  The innocent explanation is that they were lending to a poor quality set of farmers who couldn't farm well.  Except if it was a bunch of lousy farmers I would have thought they would have requested a little something from Ol' Uncle Sam.  Maybe they were so lousy that never even crossed their mind!

 A few years ago or former bank examiner mentioned a story that is worth mentioning here.  He said he was assigned a sleepy little bank in a small town.  During his initial research he discovered the entire board consisted of the owner and employees all related to the same family and same car dealership.  Unsurprisingly the bank was only making loans to the dealership and family related to it.  Consider it a little captive nepotistic financing arm that flaunted a number of regulations.  This former examiner said he immediately called his boss and within a week the bank had been shut down.  Their credit quality wasn't quality, and a number of loans were questionable.

As I read about Enloe State Bank discovered some of the oddities posted above this same story came to mind.  If an innocent explanation doesn't exist here then I think it's possible something like this former examiner story could be plausible.  Someone from a regulatory agency started to dig deep and realized that a few things didn't quite add up.  Suddenly the bank is caught on their heels and by the time the FDIC realizes how bad things are it is easiest to just shut things down.

I want to end with this caveat.  I don't know any of this for sure, but there are a number of red flags here, the biggest being the FDIC's $27m expected loss, and a $27m hole in loan data.

I will be watching this one with interest for a detailed FDIC post mortem.