(Bloomberg Businessweek) -- Shan Hanes was desperate. It was early in the morning of July 5, and Hanes, the head of a tiny bank in Elkhart, Kansas, was meeting in his office with one of his wealthiest customers. And he had a strange request.
The chief executive officer of Heartland Tri-State Bank asked if the client would lend him $12 million so he could get his money out of a cryptocurrency investment. He promised he'd pay him back 10 days later, offering $1 million in interest to make it worth his while.
Hanes said he knew someone who was helping him invest in crypto. But there was an issue with wire payments, the story went, and he needed to put more money in. At least some had gone to an entity in Hong Kong.
The client, a local farmer, asked whether it was the bank's money and was assured it wasn't. He had no reason not to trust his friend: Hanes, 52, was a respected leader in Elkhart, a city of about 1,800 in southwest Kansas. A member of the school board, Hanes occasionally preached at a local church and sometimes mowed his neighbors' lawns on the weekends. Last year he was head of the Kansas Bankers Association.
Still, the client, who asked not to be named because the bank's collapse is under review, declined to help. He told Hanes it sounded like a crypto scam. If Hanes wanted to get his money back, the farmer told him, he should go to Hong Kong and retrieve it.
About a week later, after learning from a bank employee that Hanes had wired the $12 million, he went to a member of Heartland's board. He told the director about his meeting with Hanes and asked if the bank might have exposure. A bank representative then went to regulators. On July 28, the Kansas Office of the State Bank Commissioner declared Heartland insolvent and shut it.
The Federal Deposit Insurance Corp., which was appointed the bank's receiver, said in a statement that it expected its insurance fund would take a loss of $54 million to protect depositors. That was a sign of just how badly things had gone wrong—Heartland had only $139 million in total assets. Days later, David Herndon, the state bank commissioner, told the that Heartland was declared insolvent because of a scam; in an email, Herndon said his office's involvement ended after the FDIC was appointed receiver.
The FDIC, which is conducting the review, as it does with all US bank failures, declined to comment. Hanes, who hasn't been accused of wrongdoing, didn't respond to detailed questions. This account is based on interviews with three people familiar with events that led to the bank's closing, all of whom requested anonymity.
A two-hour drive from Dodge City on Route 56, Elkhart is located in the southwestern corner of the state, where Kansas meets Colorado and Oklahoma. A statue of an elk greets visitors downtown. The tight-knit community can raise $10,000 for a person in need simply by selling chicken and noodles, in the words of one resident. And as one of two banks in town, Heartland played a key role in the community—from sponsoring a dinner at the annual county fair to providing “friendship funds” for people with medical expenses. Hanes, whose bank specialized in lending to farmers, was a pillar of the community. Now the squat building that housed his bank has a new sign: Dream First Bank, the name of the institution that bought Heartland's assets in late July.
In Elkhart, strangers wave at you as they drive past—but they're also wondering who you are and what you're up to. There was a lot of whispering when out-of-state cars surrounded the bank after it failed. In recent weeks, Federal Bureau of Investigation agents have taken community leaders with ties to the bank into the local courthouse for questioning. Elkhart residents know each other so well that they could tell who was being questioned based on the cars parked outside. (A spokesperson for the FBI says the agency can neither confirm nor deny the existence of an investigation.)
Hanes got his start in banking as an agriculture loan officer in 1993 at First National Bank of Elkhart, Heartland's predecessor. He then led the charge to buy the bank in 2011 and keep it locally owned, according to testimony he later gave to the Kansas legislature. Hanes embraced any chance to make the trek from Elkhart to Washington DC, where he testified to Congress several times about the importance of community banks. As chair of the Kansas Bankers Association, he had face time with Rohit Chopra, director of the Consumer Financial Protection Bureau. Kansas Republican Senator Roger Marshall described Hanes in 2019 as the “pride of Elkhart.”
Most people in Elkhart were spared by the bank's collapse; their accounts simply moved to Dream First. Shareholders, however, face the possibility of losing everything they invested. The bank's stock was owned by a holding company, Elkhart Financial Corp., and it wasn't included in the FDIC's receivership. Hanes and some family members were among the bank's biggest shareholders, according to a 2021 Federal Reserve document; Hanes had about a 7% stake at that time.
Other shareholders included families that owned local businesses, teachers, retirees and ranchers. One of them, who declined to be named, says she didn't believe Hanes had bad intentions. Being angry about losing money wouldn't do much good, either, she added. But the farmer, who was not a shareholder, is disappointed in Hanes and worried for those who face the prospect of losing their retirement assets. He had a right to be concerned after their meeting. It was actually the bank's money that was tied up in the crypto scam, two of the people familiar with what happened said.
Still, the specifics of the scam remain hazy. Herndon, the state banking commissioner, emailed Bloomberg News a link to an alert published in September by the US Department of the Treasury's Financial Crimes Enforcement Network, which works to safeguard the financial system, warning about so-called pig butchering. The alert describes a virtual-currency investment scam where victims get lured into giving more and more money—akin to fattening a pig for slaughter. Victims of pig butchering and other virtual-currency investment frauds have lost billions of dollars in the US alone, according to estimates from law enforcement cited by the Treasury.
Hanes understood the role that he and his bank played in Elkhart. “Consider for a moment the effect on many rural communities if they did not have a local bank presence,” he told Kansas lawmakers in 2021. “How many high school scoreboards, county fair donations, rec team sponsorships, water bottles for the school kids, scholarship donors, civic organization members, Santa Day sponsors, and parade floats are different without the support of a locally owned community bank and its employees?”
Dream First isn't quite as local. The company, which said employee jobs would be unaffected by the change, is based 72 miles away in Syracuse, Kansas. Heartland's downfall followed the collapse of four regional lenders this year, including Silicon Valley Bank and Silvergate Capital Corp.
As for Hanes, he's out of a job. He resigned from the school board and no longer has a role at the Kansas Bankers Association. Elkhart residents say they've seen him around town a few times. But he's mostly stayed at home, they say, as the investigation continues. His ranch-style house—as all-American as it gets with a basketball hoop and a big backyard—is a short drive from the courthouse where the FBI set up shop.
--With assistance from Max Abelson, Max Reyes and Zeke Faux.
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