Fraud Identification Training - Case Studies

CASE STUDY 13

Year 2 EXAMINATION This Examiner In Charge (EIC) also found the bank to be in satisfactory condition and likewise assigned a “2” composite rating. Financial information from the second year-end UBPR and the results of this examination are shown at the right. Although the type of credit card lending that the bank engaged in posed credit risks, the EIC believed the risks were somewhat mitigated by the comprehensive risk monitoring procedures implemented and the ALLL (Allowance for Loans & Leases Loss) level. The EIC expected the capital level, while then adequate, to decline as management planned for continued significant asset growth that

$144,500M $100,000M

Total Assets Total Loans

89 % 13 %

Avg. Earn. Assets / Avg. Assets

ALLL / Total Loans

6 %

Noncurr. Loans / Gross Loans T.Adv. Class. / Tier I + ALLL

12 %

58 % 55 % 6.5 %

Int. Income / Avg. Earn. Assets

Net Interest Margin

Net Op. Income / Avg. Assets

$36,500M $18,800M

Net Interest Income Non-Interest Income

13 %

Tier 1 Leverage Capital

91 %

Net Non-Core Funding Dep.

far exceeds original projections. Credit file documentation should be enhanced. Subsequent to the Year 1 examination, the bank embarked on another credit card program named CELESTIAL. Like STARSHIP, this new program was another subprime lending program and it too offered the casino promotions. But this program was of even greater credit risk than the STARSHIP program because the borrowers generally had a worse credit history. With the securitization and sale of the more seasoned STARSHIP portfolio, the bank’s cred it card portfolio largely consists of the high-risk CELESTIAL program. In fact, approximately 90% of the bank’s credit card portfolio are now compr ised of CELESTIAL cards. Delinquency notices are sent out at the 30-day mark. During the examination, the EIC checked the past due percentage of the entire credit card portfolio and discovered a 30+ day delinquency ratio of 25%. Total Assets

$315,000M $240,000M

Total Loans

Year 3 EXAMINATION You are helping prepare for the upcoming Year 3 examination. Financial information from the 3 rd year-end UBPR is shown at the right. At this examination, the EIC assigns you review of the loan underwriting standards of both the STARSHIP and CELESTIAL card programs. Due to the portfolio shift from STARSHIP, you began

87 % 50 % 27 %

Avg. Earn. Assets / Avg. Assets

ALLL / Total Loans

Noncurr. Loans / Gross Loans

76 % 70 %

Int. Income / Avg. Earn. Assets

Net Interest Margin

(45) %

Net Op. Income / Avg. Assets

$138,000M $38,000M

Net Interest Income Non-Interest Income

(15) %

Tier 1 Leverage Capital

130 %

Net Non-Core Funding Dep.