Saturday, October 31, 2020

For Banks, Self Assessments Are Hard

Self assessments are hard, period. Not just in banks. But since this is a banking blog, let's focus there.

Strategic plans should include a fact-based self assessment. Some call it a situation analysis, others an environmental scan. They usually include a SWOT, which some people dislike but I find the vitriol around a SWOT to be mostly related to them not being honest or laundry lists of things the management team plan on doing nothing about.

Strength: The Management Team. Which for some might be true. Is it supported by low turnover rates of top performing employees, deeper relationships with customers, superior financial performance?

I recognize that everything can't have a SMART goal (specific, measurable, aggressive yet achievable, relevant, and time-based). But if you are going to say your "culture" is a strength, I'm going to ask why, and what does that get you.

So should you. 

Culture is something that I recently focused on during a couple speeches (virtual, of course) on creating alignment between your culture and strategy. Because culture is the environment you create that promotes or inhibits execution. Do you have a culture of innovation, empowerment, and positive accountability?

Most financial institutions would like to have such a culture. Because that is the environment that can lead to rank-and-file employees that recognize a need, be it a product or service, among your most profitable customer cohorts, and makes a business case for it (innovation and empowerment). That environment can lead to a project team with diverse functional expertise that is tasked with implementation, and not in six to twelve months (positive accountability). 

In my talk about linking strategy and culture, I finished with the following "What Now":

1.  Adopt a clear strategy that maps where you are to where you want to be.

Imagine that.

2.  Articulate the culture you want, and perform an honest assessment of the one you have.

No hubris please.

3. Identify the initiatives you must take to align strategy, culture, and accountabilities.

Positive accountabilities whenever possible to maximize the performance of those under your charge. See my post on this here

If you build the culture you want, you will likely perform a fact-based self-assessment with the ability to capitalize on your bank's strengths and fix or avoid the weaknesses.

~ Jeff

Monday, October 05, 2020

A Whale of a Tale: Enloe State Bank

 "The bank's on fire!" So said the panicked cleaning person that ran across the parking lot from the bank to the adjacent restaurant. "Call 9-1-1!"

The bank in reference was Enloe State Bank, a $37 million in total assets, one-branch bank based in Cooper, Texas, population 1,969. The fire happened on May 11, 2019 and came from their board room

(see pictures). On fire were documents requested by the Texas Department of Banking (TDB). Which made them suspicious.

Ya think?!

As suspected, the fire was purposefully set so the TDB couldn't get their arms around what was apparently going on.

And what was going on in this tiny enclave 80 miles northeast of Dallas that has four heads of cattle for every one person? Fraud. For over a decade.

According to the Office of Inspector General (OIG) In-Depth Review (IDR) of the incident:

"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 Board of Directors (Board). The bank President used her role as primary lender, with inadequately controlled systems access, to originate millions of dollars in fraudulent agricultural and other commercial loans. She hid them from the Board and regulators with assistance from unnamed co-conspirators."

When the TDB shut them down and the FDIC investigators came in, they had to occupy the church next door because of the smell from the fire. Then they started contacting customers who unknowingly had loans. Pat Ainsworth was one such customer on the hook for a loan, $127,000 worth to be precise. Well, not actually Pat. The borrower was her dead husband. Who apparently rose from the dead two years after his death to sign loan documents.  

Since 2009, bank president Anita Moody had been booking fraudulent loans to do things like buy herself a Jeep, pay off her daughter's loan, and deposit money into her boyfriend's business account. And, it should be noted, in ponzi scheme like format, booking loans to pay for other fake loans so they wouldn't go delinquent. Over 100 loans totaling over $11 million for over a decade. 

The OIG used the term "dominant official" 64 times in the IDR. According to the FDIC, a dominant official:

"A dominant official or policymaker is defined as an individual, family, or group of persons with close business dealings, or otherwise acting in concert, that appears to exert an influential level of control or policymaking authority, regardless of whether the individual or any other members of the family or group have an executive officer title or receive any compensation from the institution... [A] dominant official is often found in a "One Man Bank" wherein the institution's principal officer and shareholder dominates virtually all phases of the bank's policies and operations. However, a dominant official can be found at institutions of various sizes, structures, and without regard to organizational charts."

 The FDIC issued this guidance in June 2011. The first Report of Examination (ROE) mentioning the presence of a dominant official at Enloe was in 2018. Moody had worked at the bank her entire adult life, having started there in 1978 while still in high school. She became president in the mid 2000's, and owned a near 25% stake in the bank. She also controlled IT access, and various other duties customary in a small bank with eight employees. Certainly enough to be considered a dominant person.

But she had help. In August 2020 the bank's vice president, Jeannie Swaim also pleaded guilty to a bank fraud charge, admitting to creating fictitious loans to channel over $400,000 to her husband over a period of five years.

The OIG was critical of the TDB and the FDIC for how long it took them to uncover the relative level of loan fraud. In the examinations done by both regulators between 2013 and 2018 the bank received a composite CAMELS rating of either a "2" or a "1". They received the "close 'em down" CAMELS rating of "5" only after Moody went all pyromaniac in her board room. A blinking red light to say the least. 

For her actions, Moody agreed to pay back the over $11 million she stole, and to spend seven years in federal prison. Where she can be the "dominant official" in her cell.

 True story.

~ Jeff

For more reading on Enloe State Bank:


Fox News:

Fort Worth Star Telegram:

Dallas Morning News (2019):