Suspicious circumstances in failure of Enloe State Bank

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.