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In-Depth Review of Enloe State Bank, Cooper, Texas Summary

On September 30, 2020, the Office of Inspector General (OIG) of the Federal Deposit Insurance Corporation (FDIC) issued an In-Depth Review of the Failure of Enloe State Bank (ESB) in Cooper, Texas. 

On May 31, 2019, the Texas Department of Banking (TDB) closed ESB, and the FDIC was appointed as receiver for the Bank. As of July 31, 2020, the estimated loss to the Deposit Insurance Fund resulting from ESB’s failure was approximately $21 million.  Our review analyzed the causes of the Bank’s failure and evaluated the FDIC’s supervision of the Bank.

Causes of Failure:  Enloe State Bank failed because the President and the senior-level Vice President perpetrated fraud by originating and concealing a large number of fraudulent loans over many years.  ESB’s President was a dominant official with significant control over Bank operations and limited oversight by the Bank’s Board of Directors.  The Bank President used her role as primary lender, with inadequately controlled systems access, to originate millions of dollars in fraudulent loans.  She hid these loans from the Board and regulators with assistance from others.  The losses on the fraudulent loans severely diminished the Bank’s earnings and depleted capital to the point from which the Bank could not recover.

The FDIC’s Supervision of ESB:  The FDIC and the TDB provided ESB with supervisory recommendations and actions that addressed issues related to the eventual causes of the Bank’s failure.  However, these recommendations and actions did not persuade the Bank’s Board and management to effectively resolve the identified weaknesses.  We found that the FDIC did not:

  • Identify the existence and impact of a dominant official in a timely manner;
  • Consistently identify and follow up on weaknesses in the Bank’s audit program;
  • Conduct additional testing to address unusual loan-related activity, which may have helped identify the fraudulent activity sooner than 2019; and
  • Perform additional procedures to determine the likelihood of fraud once the examination in 2018 identified a dominant official, unsatisfactory Board oversight, and inadequate internal controls and audits. 

In the case of ESB, examiners did not identify that fraud might be occurring at the institution until 2019, which was too late to save the Bank.

We made eight recommendations for the FDIC to improve examiner guidance and training in such areas as identifying dominant officials; understanding the independence and qualifications of internal auditors; recognizing the importance of adequate external financial audit coverage; monitoring and following up on State-issued Matters Requiring Board Attention; ensuring that system user access controls are adequately tested; conducting additional procedures related to loan activity and the likelihood of fraud; and considering issues holistically to facilitate fraud detection. 

The FDIC concurred with three recommendations in our report and stated that it “partially agreed” with five recommendations.