A small Illinois thrift says it is the victim of a loan scam that could cost it up $2.8 million.
Jacksonville Savings Bank said last week that it had discovered 40 to 60 phony loans at its Virden, Ill., branch. The $231 million-asset thrift did not say how long the fraud has been going on, but in a statement it said:
"The loan irregularities primarily included (i) creation of fictitious loans, the proceeds of which were used to make payments on delinquent accounts, (ii) improper advances made to existing loans, (iii) diversion of loan payoff proceeds and payments to delinquent accounts; and (iv) misapplication of funds."
Chairman Andrew F. Applebee said he did not expect the thrift to fail as a result of the fraud, but otherwise he refused to discuss the case until an investigation is completed. Jacksonville Savings said it expects to complete its investigation in four weeks.
Ken Proctor, a risk management consultant with Alex Sheshunoff Management Services LP in Austin, Tex., said that though he has seen little fraud in recent years, the number of incidents often rises when the economy slows down.
"I have this feeling there are more of them out there like this," he said. "You tend to find these more as the economy starts to soften."
A moderate loss can have a major effect on an institution of Jacksonville's size, Mr. Proctor added. "It's 10% of capital. That probably wipes out earnings for the year."
Roger Durant, the chairman of the Graduate School of Banking at Colorado in Boulder and the president and chief executive officer of the $22 million asset Horizon State Bank in Cameron, Mo., agreed. "That means if they're returning 1% ROA they have a break-even year at best," though things might go better if loan-loss reserves are adequate or the thrift makes some recovery, he said.
The thrift said it did not know whether it would recover any of the money. Its return on assets was 0.84% last year and its loan-loss reserve totaled $1.2 million at yearend.
Mr. Proctor said a bank that discovers something amiss should immediately notify its insurance company, because most policies require notice within 30 days of the discovery. The thrift said it notified its insurance companies and the Federal Deposit Insurance Corp., the Illinois Commissioner of Banks and Real Estate, the U.S. Attorney's Office, and the Federal Bureau of Investigation.
Toby J.F. Bishop, a partner at Andersen in Chicago who specializes in fraud, said banks that think they have been victimized need the assistance of an experienced fraud investigator. "Any investigation of fraud needs to be carefully designed and executed to prevent further damage to the organization," he said. He added that he has seen companies jump to conclusions and wind up facing wrongful-termination and defamation-of-character lawsuits.
Mr. Proctor said that to prepare for the worst, bankers must understand their fraud insurance policies. He said he had seen cases in which coverage far exceeded what bankers had assumed.
Mr. Durant said bankers should subject old customers to the same scrutiny as new ones. They should also check out all collateral, he said. "The days of a handshake and 'I'm going to pay you back' are gone."
Mr. Bishop said thinking like criminals can help bankers discover weak spots in their checks and balances. Also, he said, banks should learn from the experience of other banks. "Companies that read of these things often fail to act."