Regulators shut down First National Bank of Lindsay (FNBL) in late 2024. Although the bank was small, the failure was notable due to the presence of fraud, the high loss rate on assets, and the FDIC’s decision not to fully reimburse all depositors. A proposed in-depth review of the bank’s failure is already eight months late. We can discuss what we know, what we don’t know, and what lessons this bank’s failure might provide to banks and their regulators.
Background
FNBL was closed on October 18, 2024. The bank had only $108 million in total assets, but FDIC projected losses of $42.3 million or a 39% loss rate. SVB ranks as the costliest bank failure in U.S. history, with a mere 8% loss rate. The FDIC also decided not to fully reimburse FNBL’s uninsured depositors, in sharp contrast to SVB and Signature.
The Treasury’s Inspector General (IG) issued a Failed Bank Limited-Review on March 27, 2025. The review was certainly limited. It discussed the bank’s failure in broad terms (“a critical breakdown in the bank’s internal controls”) and provided none of the bank’s supervisory history. However, the IG committed to a more in-depth review considering the large losses relative to the bank’s size and the apparent presence of fraud. The IG anticipated completing the in-depth review no later than December 2025. This in-depth review might provide some further clues of what went wrong and what, if anything, bank supervisors could have done to prevent the failure. Eight months later there’s still no report. In the meantime, we can discuss what we know and what we don’t know about FNBL.
What We Know
Fraud and insider abuse played a major role in the bank’s failure. The bank’s president altered records and hid weaknesses in the bank’s loan portfolio from examiners. Once these books and records deficiencies were discovered, the FNBL had to recognize losses that exceeded the bank’s capital, rendering it insolvent. The bank’s president and CEO, Danny Seibel, pled guilty to one count of bank fraud and faces up to 30 years in prison and a fine of up to $1 million.
The Justice Department’s press release following the guilty plea remains quite vague, but the Federal Grand Jury indictment goes into much more detail. The indictment focuses on loans to three borrowers with spotty credit and legal histories and Seibel’s efforts to hide the borrower’s credit history, loan purpose, and payment status. According to the indictment, Seibel provided false information to the bank’s board and on the bank’s Call Reports, and failed to report suspicious activity, as required by law.
Insider abuse at FNBL was not new. The bank’s former president, E. Ray Murray, was also removed and banned from the banking industry in 2007. The ban resulted from “violations of law and regulation” that resulted in loss to the bank, and “gain to Respondent, Respondent’s family, or Respondent’s related interests.”
The bank was understaffed, even relative to its size. Ensuring adequate staffing can be especially challenging for small banks. Such banks simply lack economies of scale and often skimp on control functions. FNBL had a full-time staff of only nine. As of September 30, 2024, personnel expense represented only 0.71% of assets, placing the bank in the 2nd percentile for its peer group at less than half the peer group median. Along with serving as the bank’s president and CEO, Seibel also served at various points, as the Bank’s Chief Financial Officer, Information Technology Officer, Bank Secrecy Act (“BSA”) Officer, and Compliance Officer. The CEO’s many hats made the bank ripe for insider abuse.
Bank examiners helped discover the fraud. An OCC exam began in August 2024. Examiners initially asked for a trial loan balance. After noticing an “unusually high volume of activity, OCC examiners requested the Bank’s Daily Maintenance Report for June 27, 2024. The CEO tried to construct a fake report that omitted some of the manual changes he had made to hide the delinquent status of certain loans. However, examiners obtained an unaltered copy. Upon discovering this, the bank’s CEO texted another employee, conceding “I think I’m nailed to the wall now I [g]ave them a report that [is not] the same as what they got now and they have both.” Uh oh!
The bank was not subject to an independent audit. So where were the auditors? Audited financials don’t ensure a well-run and financially healthy firm. But they can uncover and prevent these types of blatant financial misstatements. According to FNBL’s Call Report, external auditing fees were zero. Regulators don’t require independent audits for smaller banks like FNBL.
In fact, recent changes now exempt many more banks from this requirement. FDIC has raised the total assets threshold from $500 million to $1 billion. It also raised the threshold for Internal Control Over Financial Reporting (ICFR) assessments from $1 billion to $5 billion. These changes would exempt nearly 800 banks from the annual audit requirement and 700 banks from the ICFR requirement. While some qualifying banks will continue to have annual audits, the exemption may be subject to adverse selection. Just as no doc loans attracted borrowers who wanted to lie about their income, the audit exemption appeals most to those that care least about internal controls.
The FDIC largely brushed aside safety and soundness concerns by noting that the requirements would still apply to larger banks. However, as noted in an earlier post, resolution costs can add up, even for small banks. The Congressional Research Service has pointed out that more than 85% of the 507 bank failures between 2008 and 2014 involved banks with less than $1 billion in total assets. During the 1980s savings and loan crisis more than 1,000, mostly small banks and thrifts failed at an estimated cost to taxpayers of $124 billion. Asset bubbles combined with breakdowns in underwriting standards and internal controls can affect banks across a wide range of asset sizes.
The bank’s public filings showed little sign of problems. At first glance, the FDIC’s decision not to fully cover uninsured depositors looked like a case of “market discipline” in action. If uninsured depositors know that the FDIC won’t always bail them out, they can help rein in imprudent behavior. Unfortunately, FNBL’s public filings showed little sign of trouble. As I pointed out shortly after FNBL’s failure, the bank’s capital ratios were well above regulatory minimums (and well above those of JP Morgan Chase) and the bank continued to report a healthy return on assets. Nonaccrual loans and unrealized losses on securities remained at manageable levels. There were no public enforcement actions. Market discipline won’t work if management is cooking the books.
What we Don’t know
There is also much we don’t yet know about the FNBL failure.
The CEO’s motivations. While the fraudulent lending activity clearly benefitted some of the CEO’s friends and associates, the extent to which these actions benefitted him personally is much less clear. Getting a junior suite at the Riverwind Casino just doesn’t seem worth going to prison for. It’s like cheating on an expense account. Not only is it unethical and wrong, but just not very smart.
The bank’s supervisory history. The 2024 exam led to the discovery of the fraud. We know little else of the bank’s supervisory history. Regulators must conduct examinations at least every 18 months, but these reviews can be little more than drive-by affairs. We don’t know the bank’s previous exam ratings or whether it had any previous MRAs. We don’t know whether supervisors missed an opportunity to take decisive action earlier. A 2007 Consent Order required the bank to establish an effective and independent internal audit function. The OCC terminated the Consent Order in 2009 and it’s unclear whether this internal audit function remained in place.
What specific internal controls were deficient? For example, how was the bank’s CEO able to make changes to the bank’s financials without detection? Most banks establish mandatory out of office policies to encourage cross training and to make it difficult for a single individual to perpetuate a fraud. Banks also establish segregation of duties to ensure the same employee does not originate a transaction, process it, and reconcile it to the general ledger.
Reasons for the IG’s delay. At the time of this writing, the in-depth review is already eight months past due and it’s nearly two years since the bank’s failure. The IG has not provided any explanation for why this review has taken so long. The review involved a closer look at the supervisory history of a very small bank. Contrast this with target reviews of national banks. While some of these reviews focus on niche areas, they can also cover broad, bank-wide functions like interest rate risk. Even for a megabank, examiners complete fieldwork in three weeks and must then mail out a supervisory letter within 45 days. This is a hard deadline. My personal record is sending out an SL in three business days.
Internal reviews may follow a somewhat different schedule, but here again the delay seems out of line with experience. Back in 1988, I participated in a peer review of the Federal Home Loan Bank of Dallas. Although this review covered a district regulating hundreds of financial institutions, we completed fieldwork in six weeks. The bank’s top regulator was pushed out less than three weeks later.
The most plausible explanation is also the most reasonable. The IG may have held off on the review while the U.S. Department of Justice was pursuing its case against the bank’s CEO and some key borrowers. Seibel pled guilty on May 7, 2026. OCC issued its Order of Prohibition four days later.
There is also a more concerning, if less plausible explanation. A failed bank review that focuses on deficient internal controls runs counter to the Administration’s preferred narrative around bank supervision. Safety and soundness regulators have deemphasized the role of management and internal controls in favor of the ever elusive “material financial risk.” The Fed’s Vice-Chair for Supervision has listed management and internal controls among a firm’s non-core risk that “should not drive the overall assessment of the firm’s condition.”
Whether IA requirements lapsed. The FNBL failure also raises questions regarding the sustainability of previous enforcement actions. Were Internal Audit requirements allowed to lapse? At least one regulator has directed examiners not to “test whether the remediation is sustainable over a period of me.” While that specific guidance comes from the Federal Reserve, Comptroller of the Currency Jonathan Gould sings from the same hymnal.
The Treasury IG is arguably more “independent” than its counterparts at the Federal Reserve and FDIC. The Fed’s Chair appoints its IG. The FDIC’s IG is appointed by the president and subject to Senate confirmation. However, there can be a natural tendency to go easy on the home team. FDIC officials routinely point to supervisory missteps at SVB while taking a less critical view of its own supervision of First Republic. The Treasury IG covers multiple agencies within Treasury and maintains more distance from the OCC leadership. However, the President’s penchant for firing IGs might make the Treasury IG more reluctant to issue a damning report.
The case of Heartland Tri-State Bank
Reluctance to issue a failed bank report hardly means that the IG can delay this report indefinitely. And the review might not turn out to be especially damning. The Fed’s Material Loss Review of Heartland Tri-State Bank provides good case in point. Heartland was another small bank ($139 million in total assets), whose failure resulted in a disproportionately large loss to the FDIC of $54 million. Heartland’s loss also resulted from fraud. In this case, the bank’s CEO initiated a series of fraudulent wire transfers through a “pig butchering” cryptocurrency scam. After being tipped off by the bank’s CFO, FRB examiners conducted a target examination in July 2023. That review concluded that the bank was now critically undercapitalized and downgraded the bank’s CAMELS rating to “5.”
Heartland was rated “2” or better on each of the six CAMELS components in each of the three previous full scope examinations, dating back to 2017. The IG report attributed the bank’s failure to deficient internal controls and the dominant position of the CEO. These red flags were not entirely new. Examiners also described the CEO as a dominant official in their 2017 and 2022 examination reports.
The IG did not level any criticism of the bank’s supervision. It concluded the FRB “had no reason to suspect that the events that led to Heartland’s failure were likely or probable given its prior history as a satisfactorily rated bank.” There’s a bit of circular logic here. Supervisors thought Heartland was a satisfactory because they had rated it as satisfactory. That doesn’t make the prior assessment correct or even well-supported. To be fair, insider bank frauds tend to be idiosyncratic affairs, making harsh second guessing of supervisors often unfair. But some additional testing might have been warranted. Humans can be dishonest and greedy. More scrutiny by auditors and examiners can curb some of their baser instincts. As the writer H. L. Mencken once noted, “conscience is that inner voice which warns us someone may be looking.”
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