Fraud Identification Training Sept-Oct 2022

CASE STUDY 13

JETTISON BANK

Situation:

Newly chartered, Jettison Bank’s primary activity is credit card lending funded by Internet and brokered deposits. Jettison is 100% owned by Parental, Inc., which, in turn, is wholly owned by GrandParent, Inc. Other affiliates include Telemarketing Company, Inc., which markets the credit cards, and P&C, the processing and collection company owned by Parental, Inc. A national rating service assigned Parental, Inc. an “A” rating. The primary credit card program was entitled STARSHIP, a subprime credit card program that targets individuals with bad or no credit histories and gives them an opportunity to establish a good credit record again. Management designed the bank’s credit card program around the theme that recipients of the cards may become eligible for a casino membership entitling them to various casino promotions such as discounted hotel stays, entertainment tickets and chartered airfares. Credit card limits are set at $500 and the fee for the casino package cost $425, which is automatically charged to all cards upon acceptance. However, recipients of the cards are not entitled to the membership package discounts until a certain number of points are earned based upon the card’s usage. Periodically, the bank would securitize portions of the portfolio and sell them through private placement. These private placements are arms-length transactions.

Year 1 EXAMINATION The bank received a “2” composite rating. Financial information used for that examination from the new bank’s first year-end UBPR (Uniform Bank Performance Report) is shown to the right. Management is well experienced in credit card lending and believed to be highly effective. The Bank Holding Company Performance Report shows the holding company is strong financially and able to provide support should the bank need help because of its involvement in the STARSHIP subprime credit cards. Risk in the credit card portfolio is mitigated by

$15,500M $15,000M

Total Assets Total Loans

99 % 11 %

Avg. Earn. Assets / Avg. Assets

ALLL / Total Loans

3 %

Noncurrent Loans / Gross Loans

30 % 30 % 3.6 %

Int. Income / Avg. Earn. Assets

Net Interest Margin

Net Op. Income / Avg. Assets

$1,500M $1,400M

Net Interest Income Non-Interest Income

50 %

Tier 1 Leverage Capital

53 %

Net Non-Core Funding Dep.

an accounts receivable purchase agreement between the bank and holding company, which the bank can exercise at its discretion. (The agreement has never been exercised and the terms are unknown for this case.) Management projected a ROAA (Return on Average Assets) of 5.5% for 1990.