A record of the closure of a rural bank Is encryption beginning to ‘butcher’ the banking industry?

Record of rural bank closure Is encryption butchering banking?

Source: Bloomberg Compilation: Ning

Sahn-Hannes feels desperate at the moment.

On the morning of July 5th, Hannes, the head of a small bank in Elkhart, Kansas, was meeting with his wealthiest client in his office. It was at this moment that he made a somewhat strange request.

The CEO of Heartland Tri-State Bank asked the customer if he would be willing to lend him $12 million because he wanted to cash out from a cryptocurrency investment. For this transaction, Hannes promised to repay the money in 10 days and provide $1 million in high interest as compensation to the client.

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Hannes stated that he had already contacted someone who helped him invest in cryptocurrencies online, but there was a problem with the wire transfer, so he currently needed more funds. Some of the money had already been transferred to a physical institution in Hong Kong.

The client was a local farmer. He asked if the money was the bank’s own funds, and the reply was a guarantee that it was not bank funds, but personal funds. However, he still had doubts, even though he had no reason not to trust his friend: 52-year-old Hannes was a respected figure in Elkhart, Kansas, a town of about 1,800 people in the southwest of the state. He was not only a member of the school board, occasionally preaching in the local church, and sometimes trimming his neighbors’ lawns on weekends, but also last year he was elected as the head of the Kansas Bankers Association.

Nevertheless, the unnamed client refused this seemingly tempting loan. At that time, the nationwide wave of bank failures was under review, so he did not trust the transaction very much. He told Hannes that this investment seemed like a cryptocurrency scam. The farmer told Hannes that if he wanted to get his money back, he should immediately go to Hong Kong to retrieve it.

About a week later, after learning from a bank employee that Hannes had already wired out $12 million, the client immediately found a member of the Heartland board and informed them of his meeting with Hannes, asking if there might be liquidation risk in the bank. The bank representative then contacted the regulatory agency, and on July 28, the Kansas State Banking Commissioner’s Office announced the bankruptcy of Heartland and its official closure.

Exterior of Heartland Bank, Source: Bloomberg

The Federal Deposit Insurance Corporation, which was designated as the receiver for the bank, stated in a statement that it expects its insurance fund to pay out $54 million to ensure the interests of depositors, with the maximum compensation for individual depositors reaching $500,000. This indirectly confirms the seriousness of the situation – Heartland Bank’s total assets were only $13.9 million, and now the institution has to pay out nearly half of its assets, indicating that the actual shortfall amount is not to be underestimated. A few days later, State Banking Commissioner David Herndon told the Financial Times that Heartland was declared bankrupt due to a cryptocurrency scam. In an email, Herndon stated that the agency’s involvement ended after the Federal Deposit Insurance Corporation was designated as the receiver.

The Federal Deposit Insurance Corporation (FDIC) declined to comment on this, as the company is reviewing all bankrupt banks in the United States. Hannes has not been accused of any wrongdoing, but he did not answer detailed questions. This report is based on interviews with three individuals familiar with the events leading to the bank’s closure, and they all requested anonymity due to the sensitivity of the matter.

Elkhart is a small city that can be reached by driving along Highway 56 for two hours from Dodge City. It is located in the southwestern corner of Kansas, at the junction of Kansas, Colorado, and Oklahoma. In the city center, there is a statue of a deer welcoming visitors, symbolizing the resilience and unity of the residents.

As one local resident put it, this tightly-knit community can raise $10,000 for those in need just by selling chicken and noodles. As one of the only two banks in town, Heartland plays an important role in the community – from sponsoring the annual county fair dinner to providing a “Friendship Fund” for those in need of medical expenses. Hannes’ bank specializes in providing loans to agricultural producers and is the backbone of the community. However, now the building where the bank is located has a new sign: Dream First Bank, the name of the institution that acquired Heartland Bank’s assets at the end of July.

Elkhart is a small town where strangers wave at you when they drive by, but they are also curious about who you are and what you do. In other words, gossip spreads quickly in the town. After the bank’s closure, vehicles from other states surrounded the bank, and discussions could be heard everywhere. In recent weeks, FBI agents have brought community leaders connected to the bank to the local courthouse for questioning. The residents of Elkhart are very familiar with each other, and they can tell who is being interrogated based on the cars parked outside. (A spokesperson for the FBI stated that the agency neither confirms nor denies the existence of an investigation).

Hannes began his banking career in 1993 as an agricultural loan officer at Elkhart First National Bank (the predecessor of Heartland). According to his later testimony to the Kansas legislature, he led the acquisition of the bank in 2011 and kept it locally owned. Hannes seized every opportunity to trek from Elkhart to Washington, D.C., where he testified multiple times to Congress about the importance of community banks. As chairman of the Kansas Bankers Association, he had face-to-face exchanges with Consumer Financial Protection Bureau Director Rohit Chopra. Kansas Republican Senator Roger Marshall described Hannes as the “pride of Elkhart” in 2019:

Hannes testified today before the House Agriculture Committee’s Subcommittee on Commodity Exchanges, Energy, and Credit, discussing agricultural credit issues in rural America from a banking perspective. Well done!

https://t.co/kFazSelLZB pic.twitter.com/vviJvFU9i5

– Kansas Bankers Association (@KansasBankers) December 11, 2019

Most Elkhart residents were unaffected by the bank’s closure, as their accounts simply moved to “Dream First Bank.” However, shareholders may lose all their investments. The bank’s stocks are owned by Elkhart Financial Corporation, which is not under the purview of the Federal Deposit Insurance Corporation’s takeover. According to a 2021 document from the Federal Reserve, Hannes and his family members are among the bank’s largest shareholders; at the time, Hannes held approximately 7% of the shares.

Other shareholders include local business-owning families, teachers, retirees, and farmers. One unnamed shareholder stated that she does not believe Hannes has any ill intentions. She added that, in the current situation, there would be no recourse or feedback even if one were to feel anger about the losses. However, many non-shareholder farmers are disappointed in Hannes and express concern for those facing the prospect of losing retirement assets. Two individuals familiar with the situation stated that it was actually the bank’s money that got caught up in this cryptocurrency scam.

Heartland Bank was formerly known as Elkhart First National Bank. Its office still displays plaques of past directors. Source: Bloomberg

Nevertheless, the specifics of the scam remain unclear. State banking commissioner Hurnden sent Bloomberg News an email with a link to a warning issued in September by the Financial Crimes Enforcement Network, a network dedicated to protecting the financial system, about so-called “piggy-backing” schemes.

This scheme has no relation to the domestic piggy-backing phenomenon; it simply occurs in the realm of cryptocurrency investments. Fraudsters seek victims through dating apps and social media websites, creating a fake profile to contact potential victims via social media, WhatsApp, Tinder, or other dating sites, or even random text messages, disguising themselves as incorrect numbers or familiar acquaintances. Their goal is to engage in friendly discussions with the victims, attempting to become their “new friend” or “lover.”

Once they establish a certain level of trust with the victims, they gradually persuade them to invest in cryptocurrencies and recommend a seemingly legitimate but fraud-controlled website or application. Initially, victims make small investments, and the fraudsters ensure moderate returns on their investments, even providing withdrawal operations to prove the app’s compliance. Once the funds reach a certain amount, the fraudsters disappear, taking all the money with them, and the anonymity of virtual currency accounts makes it difficult to trace.

Under such operations, victims are tricked into providing more and more money, just like fattening pigs for slaughter. According to the data cited by the Ministry of Finance from law enforcement agencies, victims of similar methods and other virtual currency investment fraud in the United States alone have lost billions of dollars. It is highly likely that Hannes fell victim to this.

Hannes understands the role he and his bank play in Elkhart. “He said to the legislators of Kansas in 2021, “Think about what impact it would have on many rural communities if there were no local banks.” Without the support of local community banks and their employees, how many high school scoreboards, county fair donations, cheerleading squad sponsorships, school children’s water bottles, scholarship donors, community organization members, Santa Day sponsors, and parade floats would disappear?”

Dream First Bank is not entirely a local company. The company is headquartered in Syracuse, Kansas, 72 miles away, and it claims that its employees’ jobs will not be affected by this change. Following the collapse of four regional lending companies such as Silicon Valley Bank and Silvergate earlier this year, Heartland, this small bank, also collapsed.

As for Hannes, he is now unemployed. He has resigned from the school board and is no longer serving in the Kansas Bankers Association. Elkhart residents say they have seen him in town a few times. But according to residents, due to the ongoing investigation, he can only stay at home most of the time. His new ranch-style house – American-style, with a basketball hoop and a large backyard – is just a short drive from the courthouse where the Federal Bureau of Investigation is located.

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