Fraud Identification Training Sept-Oct 2022

CASE STUDY 6

THE BROKEN PRINTER Situation :

The Field Office is planning for an upcoming examination of a metropolitan bank. The proposed Examiner in Charge (EIC) sent the bank a list of information to be gathered for pickup during a one-day pre-exam visit. When the EIC and the Operations Manager (OM) arrived at the bank, the President had the requested items stacked on the Board table ready for review. The data was not well organized because much of the information had to come from different departments of the bank. Additionally, the mainframe printer did not work on the day of their visit, so the President had to manually prepare some of the reports. Nevertheless, the material gathered for the examiners was voluminous and appeared complete. The material included, but was not limited, to the following: manual transcripts of the undivided profits, the Allowance for Loan and Lease Losses, and tax accounts; general ledgers and corresponding income statements for the 3 previous year ends, and the asset review date; a loan trial; watch list; overdraft report; securities listing; strategic plan; and budget. The EIC, through the Field Office’s off-site monitoring system and his preparation of the SCOPE memo, is aware of the holding company’s and bank’s aggressive posture regarding growth. Within the last five years, the holding company acquired three other small institutions, increasing the chain total to five banks with composite ratings of “1” or “2”. This bank also opened two branch locations. The asset mix of the bank has not changed over the years and the bank continually has demonstrated satisfactory earnings performance, approximate 1.20% Return on Average Assets (ROAA) over the last three years. Likewise, asset quality is strong and improving with sound loan administration procedures in place. Despite the growth of the bank, 14% two years ago and 13% last year, the bank has maintained a Tier 1 Leverage Capital Ratio no lower than 6.18% and a Total Risk-Based Capital Ratio no less than 10.40%. Examiners knew the dividend to net income ratio would be high because of the debt servicing requirements resulting from the acquisitions; however, the capital level remained satisfactory and management was heralded as very capable in the prior Reports. The President told the examiners that management wants to retain the public’s confidence in the bank by maintaining strong capital as illustrated in the Call Reports. He stated the bank’s growth was met with periodic but timely capital injections, which demonstrate management’s continual attentiveness to the bank’s capital level. According to the President, injections were made on 9-29-X7 for $500M, on 6-30-X8 for $1.3 million, on 12-31-X8 for $700M, on 6-30-X9 for $1 million and on 9-30-X9 for $600M. He also tracks the bank’s Tier 1 Leverage Capital Ratio and supplied the examiners with the following capital activity dating back to the last examination:

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