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:

OIC: https://www.fdicoig.gov/sites/default/files/publications/EVAL-20-007_0.pdf?source=govdelivery&utm_medium=email&utm_source=govdelivery

Fox News: https://www.foxnews.com/us/texas-bank-ex-president-11m-embezzlement-fire

Fort Worth Star Telegram: https://www.star-telegram.com/news/business/article245687185.html

Dallas Morning News (2019): https://www.dallasnews.com/business/banking/2019/07/20/fire-and-fraud-the-mystery-of-a-small-texas-bank-that-became-the-nation-s-first-failure-in-years/

Bankers: We Have Choices. Choose Wisely.

Earlier this month I recorded a webcast for the Pennsylvania Institutute of Certified Public Accountant's Financial Institution Conference.  Because it was pre-recorded, I had the unique opportunity to not only think about my opening and closing, but typing them out so I was clear about the message. Here is what I said.

Opening

Hello and welcome to what I hope is the most unique PICPA Financial Institution's Conference ever, and will remain the most unique ever. I come to you today, not shaking your hands, or being able to point out and joke with old friends in the audience. Instead I'm in my home office, where I'm fortunate to have my 31 year old daughter, her boyfriend and their son, my grandson, and their 100 pound German Shepherd. Also my college-aged daughter, taking online classes, and her cat. And of course my wife and little dog. There is also construction happening. So if there are interruptions or impromptu visitors, please bear with me.

With the very unique environment unfolding at my house, we have an equally if not more unique environment happening at your bank. The pandemic has changed our lives, and the lives of our employees and customers, more than anything that I've ever experienced. And I've been in a war. It's just different. I feel like we remain quarantined, and many of your colleagues and those listening to my voice right now are doing so from home. What changes are permanent, and what will revert back to the way it was? It mostly depends on us.

Today, my task is to discuss these things and what I perceive as the way forward to long-term success. In the midst of uncertainty there can be opportunity. Our job is to recognize it, and act on it. Hopefully, my brief time with you this morning will generate discussion at your bank.

[Presentation happens here.]

Closing

A few slides ago, I spoke of culture. One that moved us from being tactical, thinking no further than six months to a year out. Of being complacent, hoping that the rapid change in technology and customer preferences will pass or somehow slow down, and being a "safe-choice" employer was not the same as being an employer of choice. Being that safe choice means that employees are comfortable, have mediocre salaries, decent benefits, and job security. They may not have the empowerment, career paths, continuous development, and upward mobility that younger, and yes more fickle employees want. But what type of employee does that leave us with?

Complacent means sitting back and waiting until things settle down. Do we want them to settle back to the environment where 4%-5% of our fellow financial institutions are acquired each year because they have not invested in the people or technology to lead us forward, or continue to strive for greater economies of scale, however investment bankers define that term? Was that trajectory ideal for our constituencies: employees, customers, communities and shareholders.

Being tactical is no longer tenable in its current practice. If we continue to trade strategic investments that have short term payoffs versus ones that may take two to three years then are we implementing the changes demanded by our constituencies? Will we continue to over-invest in support functions that can be automated, while under investing in areas where increased sophistication are becoming table stakes; the technologies, marketing sophistication, and highly capable employees that will deliver our bank to customers on their terms.

We have choices. Choose wisely.

Thank you to the PICPA for inviting me back!

If you want to read a blog post I wrote for them leading up to the conference, click here.

~ Jeff

Note: If you would like the deck from this presentation, please e-mail me at jmarsico@kafafiangroup.com

Texas Big: First Road Trip Since the Pandemic

It was bound to happen. After four months of lockdown, bankers are getting back to the office. They never stopped working, mind you. But work has been different to say the least. This month was our first opportunity to visit clients outside of driving distance since March!

The challenge: We are based in Pennsylvania and our governor still has a 14-day quarantine order for those traveling from Texas. So we condensed site work, and stayed the weekend! Here are some video highlights from the trip. Over 1,300 miles.

Special thanks to the eminently polite people of Texas, and our friends at FirstCapital Bank of Texas, N.A. for such a warm welcome.

Did you know someone planted Cadillacs in Amarillo?

In case your mobile device doesn't see the video to play, here is the YouTube link: https://youtu.be/8O3FicnHxQU

Bankers: Hunker or Pounce?

Unprecedented times. How many of our borrowers on forbearance can begin making payments? What provision do we make this quarter? How do we justify it? What will our constituencies think when we have to foreclose on borrowers?

For most of us, the onset of a recession means a time to assess the risk on our balance sheet, to tighten underwriting standards, and ramp up workout teams. It's what we did in 2008-10. And we were successful. We lived to fight another day.

But is it the right strategy for this pandemic recession?

I delivered this talk on a recent bank trade association webinar. And I'd like to share it with you.

At the end of 2019 everything seemed like sunshine and rainbows. Over a decade of economic expansion. Record earnings. Pristine asset quality. Capital aplenty. 

Then Covid-19.

Unlike 2008, banks were not the bane of our problems. In 2008, we were in the eye of the storm. Sure, community banks had little to do with liar loans or what was otherwise termed sub-prime. But many banks were, including the nation's largest. And "bank" is what's on our marquee. So community banks were grouped with the wrong-doers, even though the wrong-doers were a small percentage of our industry. They represented an outsized percentage of banking assets. So into the valley sank our collective reputations.

But today, we were not part of the problem. And through the Paycheck Protection Program, we actually became part of the solution. Community banks in particular. Banks with less than $10 billion in total assets accounted for 51% of PPP loans and 44% of PPP loan balances. We punched well above our weight. 

What's more, the very large banks that participated (Wells Fargo did not initially) largely ignored their small to mid-sized customers. When PPP opened, businesses flooded the gates. Like the Pamplona running of the bulls. Most of them banked with the very largest. And many of their calls to their "banker" went unanswered. So they called around to their community bank. Call-answered. Loan request-submitted. Approval-recieved. Funding-deposited. 

Steve Busby, CEO of Greenwich Associates, a financial services analytics firm, said this about PPP borrowers: "If business owners did not know what it meant to be a borrowing customer or have loyalty from their bank, they do now."

So, a win.

But now reality. The below chart shows S&P Global Market Intelligence estimates for the rise in bank non-performing assets.

And according to multiple bankers I spoke with today, the leaning is to wait it out. Feeling like Patrick Swayze described in Next of Kin.

But do we want to pass up on the opportunity to slay the gladiator (i.e. big bank) while they're down? Do we want to pass on the opportunity to operate with fewer, yet more capable (and therefore higher compensated) employees? Do we want to retrain our once branch-centric customers that were forced onto online and mobile platforms to be branch-centric again? All the while tending to our balance sheet?

Do we want to hunker?

This is our moment. What strategic initiatives will bust our 2020 budget? It's already busted! And our collective capital position is much stronger than 2008.

This is our moment to prove we can walk and chew gum at the same time.

This is our moment to invest in our employees to develop the human element, so critical in a "relationship".

This is our moment to invest where investing needs to be done, and pull the plug on inefficient uses of our capital.

This is our moment to prove that anything the big bank can do, we can do better.

Or, we could hunker, and wait it out. And let the moment pass.

Your choice.

~ Jeff

Bankers: Who Has These Three Drivers of Value?

Two years ago bank stock analysts from investment banking firm Boenning & Scattergood identified three attributes in a financial institution that investors should look for. I wrote a blog post on it that is currently my third most read post of all time.

The three attributes were:

1. Superior Growth Prospects

2. Excess Capital

3. Strong Deposit Franchises

I can get behind these three. Can you?

Who Has "It"?

In 2018, I searched for individual financial institutions that met each of these criteria. In this post, I would like to search all publicly traded financial institutions between $1 billion and $10 billion in total assets to ensure I get adequate trading volumes to be able to compare trading multiples of banks that qualify as having these attributes and their financial performance. This resulted in 292 financial institutions (the "Measured Banks").

From there, I defined superior growth prospects as top quartile asset growth over a three year period. I defined excess capital as top quartile tangible equity to assets for the most recent year ended 2019. Strong deposit franchise was defined as top quartile non-interest bearing deposits to total deposits for that same period. 

The following table identifies all of the financial institutions that met at least two of the three criteria.

Three Ways to Align Marketing With Profitability

The inability to connect Marketing activities to the bottom line is what I frequently hear from bankers that think the Marketing Department is a cost center. Measurement is difficult. 

I also hear that silos are a problem in banking. Yet Marketing is frequently held to account for the ROI of the checking or home equity campaign. And branch bankers say they weren't consulted nor were they included in promotion planning. They often hear of the campaign on the radio while driving home. 

If you read my articles, watch my videos, or have heard me speak you know I'm a big proponent of the Marketing function taking a more prominent role in banks because customer acquisition and the customer experience has changed so much in the past decade. There must be an integrated, cross functional approach to acquiring, onboarding, and serving customers well to deepen relationships and turn them into champions of your brand. And that includes support functions. Nothing is more frustrating than turning a raving fan customer into a cynic because they get buzz sawed by the wire transfer person at HQ.

I have a bias towards profitability and against widgets. I remember doing a process review at a bank where one branch had hundreds of checking accounts with $100 or less. When I asked... you know the answer, right? A CD promotion that required opening a checking account. Widget counting. If the branch manager was accountable for consistently improving the profitability of her branch, and the Marketer was responsible for the continuous profit improvement of retail checking, this wouldn't have happened. Because having hundreds of low balance retail checking accounts attracts cost, with little revenue. But I bet you the CD promotion report had none of this.

So here is what I suggest:

1. Make profitability the ultimate accountability. 

Mandatory disclosure, my firm measures line of business, product, and feeds to customer profitability systems. And I work diligently with banks to analyze, adjust, and improve their profit trends using this information. Because I believe it is the way to go. Imagine if Marketing were responsible for the continuous improvement of the home equity line of credit product (see table).

The pushback from using profit and profit trend as the ultimate accountability, and not just from Marketing mind you, is that there are so many things outside the control of the marketer. True. But isn't that the case for any line of business with their profit and loss responsibilities? I have no control over the D&O insurance premium at my firm. But I'm sure as heck responsible for the firm's profitability. Which leads me to my second way to hold Marketing accountable.

2.  Implement Product Management. 

Which is totally related to (1) above. If Marketing was accountable for managing the HELOC product, wouldn't they engage in cross-functional collaboration to improve the profit picture? For example, in examining the above table, it is clear that the Bank has done a good job at increasing the product's spread. Fee income has been flat. And operating expense as a percent of the portfolio has been rising, even as the portfolio has been growing. Aha! What is afoot? Is credit underwriting manual? Do customers apply online and the loan moves seamlessly and electronically through the bank's underwriting, closing, and booking process? Does someone in loan servicing spend half their time on insurance tracking? i.e. are your processes scalable and efficient? Did you have a $100,000 marketing spend to generate 10 loans? All would be on the table as the person responsible for the continuous profit improvement collaborates with all areas of the bank that touch the product to improve the profit trend. And if the HELOC profit trend improves, branches will be more profitable (if they are the line of business responsible for HELOC origination).

3.  Identify Root Causes and Track Improvement. 

I'm currently reading the book Everything They Told You About Marketing Is Wrong by Ron Shevlin. In it, Ron says "The key to future profitability isn't in simply keeping customers-it's from deepening their relationships. And engagement is a necessary precondition for that to happen." There's that profitability word. What was Ron thinking? But fine, let's assume that "engagement" is key to keeping and deepening relationships. What the heck is engagement? Ron says it's whatever the bank thinks it is. And here was the chart from the book to highlight the point: 

I took a picture from my Kindle. Don't judge.

I asked Ron how to measure it, and he sent me a slide deck that showed it was measured by survey. If there was evidence that there was a strong correlation between engagement and customer profitability, I think the savvy marketer can measure it without having to perform surveys in today's AI and CRM world. But let's assume engagement deepens and lengthens a relationship. Let's look at the profit trend of a business interest checking product.

This product is much more profitable than the HELOC. In terms of ROE, fuhgetaboutit. So profitability should drive what marketing initiatives you implement.

Back to increasing engagement to increase profitability. If Marketing was responsible for assisting bankers migrate customers from low, to medium, to high engagement, how would that impact the profit picture? For one, it would lessen the operating expense as a percent of the product portfolio, because there would be no Know Your Customer, Address Checks, promotions to win a new customer, etc. And second, the deposit spread would increase because the duration (CFO term) of the product would increase, yielding a greater FTP Credit for Funds. 

By increasing the profitability of Business Interest Checking, you also increase the profitability of branches that are generally responsible for deposits, and possibly the commercial lender if the bank measures their portfolio profitability, including the deposits they brought in. 

So identify root causes with high correlation to improving product profitability, and measure Marketing on them. 

This level of accountability breaks down silos as Marketing now works with various departments within the bank to improve the profit picture, and aligns Marketing interests with those of profit centers (i.e. no hundreds of low balance checking accounts). When product and therefore line of business profitability goes up, so goes the bank.

What's stopping you?

~ Jeff

Money Is Math. And Math Is Color Blind.

Typical conversation at my house:

Me: How much was on the credit card?!?!

Wife: Well, it's because of [reason 1], [reason 2], and [reason 3].

Me: Our checking account doesn't care about the reasons. We pay the amount on the credit card, and it comes out of the checking account. Simple math.

This conversation is amplified for households in low-to-moderate income (LMI) families. So often they have too much month left when they run out of money. Causing them to do inefficient and costly things such as remit late payments and be assessed a late fee, use a high-cost payday lender, or sometimes ignore the bill. The cascade of falling dominoes leads to societal dependencies such as 30 million children relying on the National School Lunch Program for food. 

Nobody described this situation better than John Hope Bryant, an American Banker 2016 Innovator of the Year, in my firm's This Month in Banking podcast three years ago. I encourage you to listen to it for ideas on what your financial institution can do to facilitate economic mobility among LMI families. 

I also penned a TKG Perspectives article on the Community Reinvestment Act, its obvious lack of effectiveness if you consider outcomes instead of activity, and what financial institutions can do to promote economic mobility and community development.

Hint about the podcast and the article: It's not about altruism or box checking. In Bryant's words, "you can do well by doing good."

We tend to be emotional spenders and don't consider the long-term impacts of our decisions. I recall being the "money guy" for my daughter's travel softball team. It was a club team and we had an annual fee. Club teams are important for players that want to be seen by college coaches. 

We estimated our expenses and divided by the number of players to determine the fee. We usually rounded up in case of unanticipated expenses and to help families that may not be able to afford it. One family didn't pay, and after several unsuccessful attempts to contact them, we determined they must not be able to pay. So the rest of the families absorbed that expense.

And then the family showed up to the first tournament with the nicest ride on the team. They made the decision to buy a nice car, and couldn't pay for their daughter's club softball team. I'm sure the emotional excitement of buying that car, and pushing their budget to the limit, might have made sense that day. But imagine if, instead of other parents paying that fee, we kicked the girl off of the team? Had they considered this outcome when asking "can we afford this car?" 

This is where banks can play a constructive role. Had their bank positioned themselves as an advisor, the banker would've counseled the family on cars they could afford, without pushing the family budget to the brink, running the risk of dominoes falling if one thing went wrong, and teaching sound family financial management. Perhaps even set them up on budget monitoring tools and automated savings apps. 

Because we often make foolish financial choices if left to our own devices. Think how many people don't contribute to a 401k minimally to get the full company match? People leave the company match piece (i.e. free money) on the table because they don't want to reduce their pay by their contribution. What bank financial counselor would recommend that?

Financial foolishness is color blind. We all could use a dispassionate advisor. But it's particularly acute among LMI families because of the reasons stated above. 

As John Hope Bryant said in the podcast, in the U.S., the poor can save capitalism. Banks can help make it so.

~ Jeff

Note: If you're interested in my annoying video to my daughters on personal financial management, click here. I still own those shorts.