Fraud Identification Training Sept-Oct 2022

CASE STUDY 19

THE CASE OF A FRIENDLY FRAUD

Situation:

You are the Examiner in Charge (EIC) of a $450 million bank in a market that experienced rapid commercial expansion about four years ago. President I. M. Friendly has managed the bank for the past 15 years. Your pre-examination review of local economic conditions indicates that the market has slowed substantially, but a review of the UBPR (Uniform Bank Performance Report) reflects the bank’s construction loan totals have continued to increase. You are concerned with this seemingly contradictory trend and instruct your AM (Asset Manager) to target construction loans when she prepares the ALERT (Automated Loan Examination Report Tool) line sheets. After her initial review of the line sheets, she informs you that a construction line to Big Time Builders, Inc. (BTB) is approaching the bank’s legal lending limit. There is a well-documented line sheet from the prior examination and the line is current. Nevertheless, because of the large dollar exposure in this line, you instruct your AM to work this credit first. A review of the prior line sheet revealed that BTB had been under the same family ownership for over 20 years and was a well-known local builder of office complexes and shopping centers. BTB also maintained ownership of some of its previously constructed properties. Additionally, the AM noted that BTB always used this bank as its lead lender, and BTB’s president, Stone E. Gravel, went to high school with President Friendly. President Friendly is solely responsible for the BTB relationship. During the AM’s review, she noted all required documents were present. Appraisals are approximately four years old but indicate that the pledged real estate indicates a 70% loan-to-value. The final title opinion reflected the bank in a first mortgage position. The AM also reviews the company’s current balance sheet and income statement. This self-prepared statement reflected an undercapitalized company, which is not unusual for a family-owned business. An attachment to the financial statements indicated BTB had six projects in various stages of completion, but four of them were encountering cost overruns. The AM surmises that these cost overruns could result in a short-term cash flow problem and impair the company’s ability to generate sufficient internal cash for operations. Concerned about BTB’s potential cash flow need, the AM tells you this is definitely a credit she will want to discuss. During the second week of the examination, you review a new $1.3 million relationship of Operating Management Company, Inc. (OMC). OMC operates/manages various commercial buildings. President Friendly is solely responsible for this relationship as well.

1