Fraud Identification Training Sept-Oct 2022

CASE STUDY 14

AQUA VALUATION

Situation:

Third National Bank is a $225 million bank in Fargo, North Dakota, and a certified lender under the Small Business Administration (SBA) program. Jimmie Charter, one of seven loan officers at the bank, completes the applications for and administers SBA guaranteed loans as well as other loans. No other bank officer verifies the SBA guarantees. For the last five years, Charter has been the servicing loan officer for the account of AquaVal, a partnership equally owned by Joe Briggs and John Stratton. This company is engaged in the testing of bottled water bacteria levels. In addition to this partnership, Briggs also owns 50% of B&C Leasing, Inc., a small leasing company formed 10 years ago that leases drinking water treatment equipment to municipalities. The leasing company has $113M borrowed from the bank in the form of one note. Loan Officer Charter is the other 50% owner of the company but is not the servicing officer of this credit. Neither of the credit lines was adversely classified previously. The ALERT (Automated Loan Examination Report Tool) line sheets show that AquaVal has two loans at the bank with balances of $734M and $283M, respectively. Management reports both loans are 85% SBA guaranteed. The confirmation received from SBA shows only the larger loan is guaranteed. This larger loan, made in June 20X8 with an original balance of $775M, was for business expansion and is collateralized with a real estate mortgage on company-owned property independently appraised at $900M. The stated purpose of the second loan is working capital and the collateral is Accounts Receivable (AR). Charter informed the Loan Committee that the company was experiencing tight cash flow because of seasonally slow sales. Based on Charter’s representation, the committee approved a $350M loan. Charter did not disclose to the Loan Committee that the bank was holding an additional $63M of overdrafts as “cash items”. Loan Officer Charter did not have a current AR Aging Report; however, he called to request one from Briggs during the examination. While on the speaker phone and with the examiner in Charter’s office, Briggs stated AR currently total $641M, and that all are current except for $75M, which is over 90 days delinquent and uncollectible. The loan to B&C Leasing, Inc., is a term note that originated at $115M. Although the company generated a net loss of $175M, after depreciation of $45M in 20X9, according to the ALERT line sheet, the loan had never been delinquent. While reviewing the credit file, the examiner saw copies of AquaVal’s DDA (Demand Deposit Account) statements for August and November 20X9. Both statements had automatic debits of $1,100 recorded. He also recognized that the debit was equivalent to B&C Leasing Inc.’s note payment amount.

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