Scribd Logo
Upload

Welcome to Scribd!

  • Bank Management: Text and Cases: George H. Hempel

    Uploaded by

    kira3003
    3K views350 pages
    Shows how to apply bank management concepts to real-world bank management. Provides cases and a simulation, presented from the bank manager's perspective. There is a new chapter on innovations in products and pricing, and there is more material on bank financial decisions, the changing nature of bank management, and evaluating bank performance. Includes twelve new cases, including several on managing the loan portfolio.

    Original Title

    Bank Management: Text and Cases : George H. Hempel

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    Shows how to apply bank management concepts to real-world bank management. Provides cases and a simulation, presented from the bank manager's perspective. There is a new chapter on innovations in products and pricing, and there is more material on bank financial decisions, the changing nature of bank management, and evaluating bank performance. Includes twelve new cases, including several on managing the loan portfolio.

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    3K views350 pages

    Bank Management: Text and Cases: George H. Hempel

    Uploaded by

    kira3003
    Shows how to apply bank management concepts to real-world bank management. Provides cases and a simulation, presented from the bank manager's perspective. There is a new chapter on innovations in products and pricing, and there is more material on bank financial decisions, the changing nature of bank management, and evaluating bank performance. Includes twelve new cases, including several on managing the loan portfolio.

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 350
    FIFTH EDITION BANK MANAGEMENT Text and Cases GEORGE H, HEMPEL Methodist Unvensiey DONALD 6. SIMONSON University of Mew Mesice ®) John Wiley & Sons, Inc. |New York « Chichester» Weinheim Brisbane + Singspre + Toronto exo MARKETING MANACER SENIOR PRODUCTION EDITOR Coven Dosen’ INTERIOR DESIGN MLLUSTRAMON EDITOR ‘at took was et in Times Roman by Ahern Graphics and pine and boun by Halon Pint {ng The cove was pared by LaNg Fess. “Th took ie pint on ac fe pop. © Copyright © 1909 Joa Wty Sor In A igh serve [No pt of the publeaton may he opeaduse, ved in 2 rv etm or transi in ay former By any ean, elcraie maton, otcopying roorlig Sanning Fete, (Spl pormtiodsmdes Stowe 107 10 of he 16 Uned SaesCapgrigh ct tnt ce ‘ber he pion permason of he Paieer, or author though payment fe PP [inte prcopy fos the Caprrght Clans Cont, 27 Ronowod Da, Danvers MA OTE {575 758i, ax G78) T-4PE Reuse o he Pabst fr pein should be dave to {be Pomiione Department, in Wiley Sone ne, SE Ths Aven, New Yo NY 1156 ‘nz, (12 sS0e00 fax i 150-48, Nal: PERNIREQWILEY COM, To order books plese cl on) 2838 Litany of Congress Cataloging in Pubieation Dat Hempel George Bink ugement let and een. — Sh ed. / George M Hempel Donald GSinanon. om teddies BAN 0471103609 (oth alk pope 1. Sank management 2. Jank Hnageien—Cae side [Simonsen Dora G1 Tile sav oarionos Pat inthe Uo Sa of Aeron BIBLIOTEKA Preface “The evolution in the principles of managing firancal institutions has been dramate. It was aot very long ago that all but tke large money market insitaions could rely on ‘comfarable ontlis abou banking a loyal, geographically bound customer base. They ‘ould take fr granted eran Fring hae of depesitors who had few other outlets for theic money and of lcs erediteustomers who deporded on them as thes sngular barking connection. The greatest change har been the way that campettive and financial market forces have penezaed into cstomer relationships, Scacaly any significant banking ans action take place without the need to assess actual or potertat competion. Thanks 12 the raid spread of nationwide baking, managers ia previculy isolated local markets ‘ow contend with naional, ae mich a¢ lee, competion, Furthermore, maragers are ware hat they must understand and adap: ote nfeence of an efficient financial market, fad they mes! text their local transactions agains picing signals generated bythe market. ‘Changes in te nancial markets themselves have ben equally dramatic. Phenomena like financial restructuring, 2 steam of innovaive new financial instruments, and dsivative markets that reste opportunities loredstibue risk challenge the adapivity of managers. ‘Banks find that problem solving using entrenched role proceduces cr depending on the lerowledge and character of domnant CEO is no longer adequate Problem solving has become more enaitical and informed by fnaalal markets and modern financial theory Tern, these developments ae forcing a dramatic evolution in the teaching of the financial management of Franca ntittions. AU one tims, some intrctrstaygh this subject an enclusivelysitualiontased one, The concept was thatyou could deduce good management pacice on 3 case-by-case basi, studying 2 mix of situations that presented themselves to managers in rich latiuional sorings. Well-conceived eases called for students 10 apply sound logic in the prepuralon of creative soluins. When cums- Inte, enough such cae svation sertanly helped to round ott students, But it was not safcent. "Tobe sur, contextual eamirg cannot be abindoned in a pedonsinanly institutional course. Missing, however, te andytical and theoretical devices to unity the series of {nstonal pis, In this book oar aims ct 1 gn he insttainal sing of banking ‘bat to present tin a famework hat recognizes the vast bridge to financial markets and theory that has developed quite recently. These developments prove a great oppotnity for teachers to enhance their courses of stay with powerful inition. The Mh esiton ‘of Bank Managenen: Text and Cases is committed 1o bringing this opponteity full WHO WILL PROFIT FROM USING THE BOOK? “This book uniquely appeals to urdereraduste and graduate courses in financial insiution management at well is seminars for practicing bankers. At uivestes, i is helpfl for students using the book to have completed the introdtory course in Hrance at either the tradvate or undergradvate level, along withthe usval supposing courses in accounting, aie, and economick. However, stents without a compete formal espsute to these backgrabed courses can sill succzed, for we introduce the fundamentals of topics that, ‘would orainarly be bull from sess sipporing cowses. The book is appropiate fr elee= tive courses tht qualify for majors or concentrations in fiance, accounting, and general tmanegemeat. Professional have used the materials for specialiad study in arabe of tress, ncluding bank performance analysis, eet management, asset and Wily man agement, and, recently, the fundamentals and applications of derivatives. Each of these yeas is supported wih ively case materials NEW IN THE FIFTH EDITION In tis edion, we continue to leverage the wisdom and insight offered in past editions ofthe book. Asin earlier editions, we continue to explain the management of profit and ik in funding, lending, lguicity, capa, secures, and coordinated asset and ibility activities. However, the fithedton is extensively "e-cagincoed” to meet the needs of theve rapidly changing subject. Te book now incorporates technical Fnac in ive caw chaptes and appendices, The followin lists some ofthe most extensive changes in scope and oper. + A.now Chapter 4 provides 2 thorough inroduction to valuation in banking bese ‘on fixed income and business finance theory. * Arnow Chapter 5 eateods and carefully paces the analysis of asset and ibilty management, with emphasis on insights about is infraction with yield curve be havi. We also emphasize bats rick + Chepers 13, 14, and 15 present the complete analyses of forwards, furs, op- tions (spesally opion-tke baking products), and interes rat swaps and the ‘moves in which thee instruments wade. We integrate derivative product nto Dank hedging and product pricing + Teenicsl appendices 10 the fve new chaptes with banking applications provide potential for active and challenging graduate student projec. “The umber of chapters on credit hasbeen reduced from fout toes: hese chapters now are based on 2 unifying model that claifies the structure and sep- ‘wise management of bark credit csk 1 The numberof cases has been reduce from 27 to 20 select cases in this edition: Preface these iachide sveral classic ease fom prior editions and seven completely now cass, Several ofthe new eatet present inside loaks a ata appliestions of de- rivaives (0 manage banking prodects, balance sheet stwtwe, and curency risk +A sich collection ofend-of-ehapler problems has been added: mot of these are Sutent-ested computational problems that encourage student 10 leam-by-doing applcacons of principles aniculated in the chapter. + A more sudest-rendly format has bean sddea in which many chapers now in- comporate Fequentvignete™ examples to renforce the significance of text di cssions STRATEGY OF THE BOOK ‘Thistevsion has been writen to provie considerable instructional Nib. Our expeci> ‘ence wth many insvuctor of bank management inicaes that hey ees variety of routes to achieve successful student leaning. This hat led to conchde that book om the ‘management of financial fsitution should include elements of business finan theory slong with we pracca insitvoral material that disinguishes financial businesses from nonfnancal ones isrcters who emphasize practical and tadhional infomation will find as strong a support base inthe book a ittevctors win emphasize the applicability of financial pneipts to nancial nstttons, If a book witout analytical gor is insufficient, neither isa book sicint that ‘excludes pascal conent, Our experience indies tat saudens emerging from invodac- tory courses in finance and accoxmting sometimes assume that ube ature ofthese subjects is merely computational Using end-o-chalar problems and ease exercises, we feck (0 raise computation to Rigiar level that reies inference. Inthe abeence of practical beockground movers, Adieu to infer what is poing on a the instutoea lve ‘Similary, the book offers Hexblty in the level of analytical igor. The chapters ‘on valu, sset and Hability management, forwards and futures, option, and swaps all progress trom patient inreductions af fundamentals co more challenging applications and, finaly, to appendices at contain vance and often rigorous concepts ae applications ‘that appeal to graduate finance students These include pics such as Geriving sk prem ‘ums Uxough sup carve interpolation using convexity measurement, detaling Hoan pricing ‘rom Eurodoliar sips, using binomial pten models to ind prices fr opin-eibedded ‘banking produ, pricing ape off ofthe foes market, inferring swap pacing from the swap curve and comparing various curreey hedging technique. ‘The purpose of this book isto present the concep and techniques that will help ‘bank managers be sucesso inthis challenging pei. This book is based on tocoughly updated and comprehensive text materisls, nests af end-oFchaperexerites lo ren force the leaning of key points in chapters, and « cmplement of 20 well-researched cases. This opening chaperprestats an introduction oth changing natre of bank mar agement. The remainder of the tox is dived into four pats. In theft par. Chapters 2 rough 5, we deal with basic materials on the changing mature of banking, messing tank performance, andthe masket foundations of val in banking. Chapter families the reader withthe balance thee and income salomente of fasocal institutions, end ith special banking noanes such as accountng for loan loses sources and uses of finds, “gap” repicing schedules, off-balance sheet tems, banking sks, and risk-ewrm Preface tradeffs,Chapier3 provides ool forevalaating banks’ financial performance, inloding ‘enhancements to risk end return measures discussed inthe preceding chapter, We aalyze Uniform Bank Performarce Reports at the crucial peconmanee report card svilable of every barking frm. Chaper lays oa the theory drawn from financial markets for ule ‘Sanding how value is created in nancial fms and discsces how banks este valve os ‘omisal contractors I focuses on the time vale of money o demonstrate how seasvity tothe Interest ate envicnmeat affects valves In banking. Chapter 5 reviews bow banks ‘control earings exposure to Financial makel,integraies the they of the term strc fof intrest rates with asst and liability gap srlegis and shows how market inform banks abou isk premiums. Part Two, Chapers 6 109, covers many ofthe Key elements of bank ss, abi and capital management. Chapter 6 scsses such topics as deposit ana borowing sources ‘of funding, effets of the growing funding spread, fees of sie and type of bank oo the funding decision, sks associated with funding decisions, contingency funding, and satoges for atracting fonds in the ever changing mosey marke. I also Incudes 3 ‘suction oa measuring and using the cost of funds Chapter 7 dseasses the caleuation of reserve requirements and ow banks apply corporate cash management principles to eae ‘ae reserves. I reviews how a bank measures and manages ils iquidty needs. Chapter covers the management of bank seeuiy potolis. The chape starts witha description ‘of waditonsl and newly evolving secures that banks may own and discusses how such ‘stcuries ae priced. The dynamics of security valuations are examined, followed by & ‘meta loans, ea estate Teas, eter loans, pd leases isthe inerest the bank reeives fon exch of these specific asa categorie. All intrest income, less asocisted expenses, iz taxable, with the exception of tome ofthe intrest income on securities of state and local governments which may be patally exempt rom federal income axes, Interest expense on NOW and ater tasacton accounts, savzgs accounts, CDs of| '100,000 and over, Ge cerifcate, shor-term boring, eter Hailes, and suber ‘ated debt includes the itoest expense on each specific depositor liability category [Every eategoy ofinteestexpense is a deductible expense fr detemining sbank's income Net interest income isthe eifference between interest income (evenves) and interest expense It measures how mach toa interest income on al earning assets exceed tol Staest expense on ll sources of fonding revision for loan lose the smcunt charged agains earings o establish 2 re= serve sufficient to absorb expected loan loses. Intemal Revenue Service rules set the ‘maximum amount that con be a x-deductible expense and that can be included inthe ‘valuation reserve account othe balance sheet. Management based on is knowledge of {he quality ofthe loan pontflio an the opinions ofthe regulatary authorities, may charge more or less than the maniman 2x-dodetble amouet iit believes this amounl i more appropriate for possible loan losses. 4 a2 (Chapee 2 Understanding» Bank's Fauna Siatements TABLE 2.2. First National Bank’ Income Statements for Specified Years Ended December 31 (in thousands of dollars) 1999 2000-2001 INTEREST INCOME, Shorter insrments 265, Secarian 9.324 (Commer tons 7960 Contre lane oz0 Real etal awe 4693 Othe leans 2228 eee ‘9 “oul irs income 441 INTEREST EXPENSE [NOW ond ser transaction accounts 2301 Srngs accounts 3.08 ine certificates ander $10,000) 6508 (CDs $100,800 and over, 1s Othe interen-earngdepsts a7 Borawed fonds 490 Other kilts ond wanes ° “Toll intret expense 15,020 NET INTEREST INCOME 19.461 Provision fr la loses 570 NET INTEREST INCOME AFTER PROVISION 18,91 NONINTEREST INCOME. Deposit zerice charges 269 anH4 (ther naires nce Ts 1g Tat eons income ais 72 NONINTEREST EXPENSES Selves and benef yom oar gas Premises and eqipment expense 2218 aaah 738 (ther aeintrest exense 398 = 40 aie “Total wanntzest exeases 15238 15579 163508 [NET OPERATING INCOME 7 818 Bal SECURITIES GAINS (LOSSES) 35 ° 2s APPLICABLE INCOME TAKES 2s 2g S EXTRAORDINARY GAINS (LOSSES) © ° ° NET INCOME 522 S85 5.900 ‘CASH DIVIDENDS PAD 3003600 3.720 Unseemanling 2 Ban's Inco Sates Net meres incme afer provision set ierest come less the provision fr loan Tosss, It represents an attempt to adjust tbe ne interes income dowrward by proxy measure for Ue credit isk akon to obese meres income Deposit sence charges inclide income frem maintenance fees and varius at vity fees that most banks charge on thet deposit accounts under a cetain 2, Bust esses usually receive a credit aginst these charges based on ther average Dalancrs whereas fees on individual deposits are ofen walved I a iimum balance regimen ‘Orr noninterezt income ineludes ts net income fom the bank's est department {iF v has ene), commissions on insurance pemiuns, income from direct leave Brancin, ‘commissions on mua funds sls, trading account income, safety depsit cena fees, and miscellaneous noninterest income sources. Fes or originaling loa ot guareneed Tines of ered are often included in his eaegory. Solares end beefs represent the Wal compensation psd fo al offers and em ployees ofthe back. This compensation ineludes nt only saree and wages but also ‘unemployment and social secrty taxes pl, conribtions lo esizement or pension pans, cost of medial cr health services, and other fringe beneRis provided officer and employees ‘Pronlses and equipment expense consists of depreciation on premises, computers, sv equipment, the real or leasing cos of offices, computes end other machines, abd taxes on premites and equipment (Other novinerest expense is gener extegory fora bank's emsning nonoterest ‘operating expenses. Tis account usually includes such expenses 2x advertising, pemiins ‘on deposit insrance and deity insurance, decors’ fees, supplies and postage, and cots ‘ssociated wits temporary employees. This category now includes security gains or losses from th ale, exchange redemplion, or eine of investment secures above ox below the value ot which these socuitias are canied on the bank's books ‘Net operating income (before taxse! isthe difference between ttl intrest and ‘noninterest income and total expenses. Aliough banks pay the existing corporat income {ax rates, net operating income s usualy adjusted sligny 0 determine taxable income. ‘Adjustments are usualy to subuse the iret on tax-exempt securities from net operating income before taxes; however, other adjustments may be needed if the Denk uses other tax avoidance (echaigues, ‘Secures gains (loses) epresent he reained gains or lotses from the aca sales any securities during the tne pared. Sesanty pains are generally taxable a the bank's cexdnary income ax rate, and losses can be used Yo reduce taxable iacome Applicable income waxes ined federal and any state and local taxes on the bank's taxable income. Exraordinary gens (lass) eprsont gains o¢ loseston enue nd ypcaly non recurring events. These evens may or may nt be taxable and ae usually reported net of any taxes. "Ne income or afer tax income is taxable income Including security gains or esses ‘and extraordinary items, les he estimated federal, stat, and loca income taxes payable for that year. Some bank regulators and analyts favor using net operating income afer ‘axes as the primary dollar meusire of a bak’s income. Theis compsted by eliminating nonoperaing events, sch as significant gains or losses onthe sale of sees or exraor inary gains or losses. 4% (Ghapter2= Unertonding ¢ Bek’ Financial Statens ‘SUPPLEMENTARY INFORMATION Meme from 4 bank's balance sheet and income statement are generally accompanies by other infemation useful in evaluating bank perfomance. Tabie 2.316 an example of useful supplementary data that are asualy availble in a bank's annual repon, is 10K repon, or bank reports avaiable on the iteret. The supplemestary lems ae ae follows Barning aset efers all asses eering 2 explicit intrest return. Cash and dae from banks and bank premises and equipment ae the two major asset eategories hat ate not eaming asses ‘Rick arets re caring assets subject o either cre risk or ineret rte isk. Some banks sil ealoulte isk asses a5 raring assets es all government secures, However, Firt National Bank uses a more appropristedesgenion of caring assets ls ll thor term insements and investment sezanties maturing witha one year TABLE 2.3 First National Bank's Supplementary Information (in thousands of dollars, except ast four rows) 1999) 2000 2001 Eoming assets average) ons “aaa “92978 Ris oss (verge sro2it 396,251 400,788 atures of scares ‘Undor are year ase ano 2.86 ‘One te joa 56401 50,186 ay Over fe yen 34217 55885, 527130 Inder Lane 0289 ‘104 TeAe Loan loses les recoveries ‘80 2 720 Noncaztat (ver 90 day) Hans ‘Camera loa a 28 387 Gonsumer lars 0 M0 2013 Peal eat woe 156 no 7 Other lune and lessee ° © 60 Core depo anysz 00.688 ‘asaie gad assets 37.566 22920 ‘3807 Unused caremitmente 24188 25,960 anne (OfFtelance shot desivatves ° 0 ° Parkes ieigage avon rights ° a ° Noncoe funding 37392 45,155: 2200 Ieteret ete sersitviy (ne yee) Reprcing assets 192435 2,788 220980 Reprcing Lai area 255.165, 299.366, Morn fad ele © ° 1408 Number of foes 7 > ° Number of enployes 245 20 256 [Numbeeo emmon saree 12m 20K 1.200000, Market pice per share 3642 aia 635 Matures of secures classify a bank's investment secre into selected mausiy categories. This information is elpul in underatanding the ites sensitivity of he sece- ‘tes portfolio and the poteialappresaton or depreciation of this poaolo if ites, rates change. Insider loans are loans to members of the board of directors oF top management and o busnastes in which such pesons havea substantial owneeship interest ‘Lan losses es recoveries epeseat the ata loan sss the hank has reconnized during the year less ary recoveries of previous fan losses. ‘Noncurrent (over 90 dass oars se loats on which inerest or piociga payments oc bot have ot been paid at the caniacted time, Usually, a bank allows a short grace potiod (64, 60 oF 90 days) before itcesifies a lan as nanciment, Noncurent loans tiffer from caeifed loens, provisions for posible Joan lestes, and loa loses, elthough all these eatepories give some idea ofthe zeit quality ofa bank's loan portfolio, Many bunks also report noaperforming loans or renegotiated loans. Unused conmimens ate frm commiunents to extend loans o wo complete ether vwansactions usually tan agreed rate and for ast period of ie. Offbalance sheet derivatives refer toa wide arey of secures whose value is do- rived from an underlying sear, Many ofthese derivatives, sch a swaps an options, fe not included ona bank's Balance sheet. ‘Purchased morgage serie righ ae he righ o collect principal snd intrest on mortgages owned by anotier insti. The purchasing bank receives les for collecting Such payments abd sing them tothe owning ination, "Noncore fvding are impersonal (noncastore) deposits and borrowing which the ‘hank has basicaly purchased by payinga competitive rate Such ables are more vlner- able wo withdrawal tan core (customer) deposit and borowings Interest rate sens refers 0 2 comparison of the sensitivity of each Foss on assets snd ibis to changes in intrest rates. Ineres-sensive assets (habits) are any calepory of assets (lilies) on which interest income (expense) wil ekange in he _pscifed time peti response citeres rate changes, Te ime period of such seni ity should be identified. Many banks measure rat ensiiiy for several ime pviod (6 30 day, 90 days, six ons, nd one yar) because of sizable ime diflerenes in enstv= ity beweon asets and lailes.A dala gap (Efference between sensi assels at sastive ibis), a5 well a5 the rato of sensitive asses ro sensitive lait, i often coated Mucual funds sales ar he principal aroun of moti fands sold atthe bank ding the year. Banks generally recive a selling commission, ‘Number of ofecs refers othe numberof branches and manned offices ofthe bank. Unmanned ofces, ATMs, and stand-alone computing unit ae nt included ‘Number of employees shoud be the number offline offers and employees plas the follaime equivalent of «bank's par-ime employes. Temporary employers generally ‘ae not included ‘Munber of common shares we the numberof sharcs of common stock that reissued ‘and outstanding, They te usd (0 calculate caraings, book value and market valu pet share, “Market price per shares avilable for ager banks whose cares are atively red. Data may no be available or rot as meaningful if bank is the nendominant rember af ‘a bank holding company or if he bank is small and doesnot have an active mazket for its shoes, 4s TOTAL ASSES @) Cash aud doe om metitatioes od fonds sold ae ve ropa (ther sherry isramente Secsites “eating ecm ase "Ne Tor ard Temes remiss and Bed esate (Other el extend acd end itambles Allosher ste Taal Demand dept Iutres-beatng depois Fed fund purchased ed eps thee borove fers, Aller laies Sobor deb Prclered tock Common ck Supls Undivided pris "Taal INCOME STATEMENT (6) Interest incre Inert expense Net mere ini Provision for Ton oes Net interest cee fer provision Noninerest inane Newinterest expenses Net operating income Secunty grins (owes) ‘Aprliable income aes tray os) SUPPLEMENTARY INFO (6) Eneieg esses Langer wes (54 years) Inde ons Loar ones et recveies "Neneurest luns ‘Unis examen OF balance die dvvativee Purchased morene service rights Vela abies SUPPLEMENTARY INFO () Number of tie amber of employees 75535 Liste on 00% nape 0.00% 1st lms ons 549% p99% 123% 65.19% oa 77% 0.585 ome 0.00% 900 501% 0.0088 01% aun aos 3.82% 023% 014% 1.06% 9.08% 12458 75M 322% 055% Loa 00% Laie 3036 ans 9.99% 2549 5255 2309 323 2387 les ° ey us 3.648 1838 68 198 sous 8307 73686 aK 00% ‘00% 310% ‘10% 90% 253% ous 00% 130 999% 3130% Sta 118% 029% 03655 0.008 0.00% oD 1216 as 00.00% 49,709 16558 32281 1st 31087 30,190 29292 11935 oy aa ° 8.250 sign 1073s 15675 256 6232 s7086 ° ° nai 6 49 37930299 Tos 212% 1620% sae oLaa% 130% one sie 4.956 0.05% 190% 55.97% 450% 543% 29608 260% oo ase 240% sale 10003% 206.155 Luis4s7 119265 “16.98 1208.64 32391 Tnosee, ‘oun 579 sitgm ° 00938 50421858 6ae1.972 295.662 751 18365 zraatoas 38.212005 799.93 1o.nosot 482 194628 27051,489 254% arm ‘0% nas 07s T7986 8% o0nse 02% 204% wooi% 16258 ers sae m2 s68% 10% 2558 00s 22. 226% a8 00.00% 2006.908 100.137 06251 ‘o2aa1 903,420, 381829 B37373 458380 13396 1553893 ° suse 24500887 S68 273 sro ‘8,701 x5 008 18,908,157 11305,366 2018 aor6.183 a 65085, ‘An tatrodtion Wo Lon Las Ae DATA FOR A TYPICAL BANK? Upto this point, you might imagine that most commercial banks hod sine balance ‘ets, income statements and supplementary information. This it cenanly nol the ease ‘abie’24 presen the balance shoes, income slatements, and selected supplementary Information from a recent yedf for ve conosco} banks: American Heritage Bank in EL Reno, Okiahor Atnerean National Bank of Sory Couns, Nebeask; Overton Banke nd Trt in Fort Wonk, Texas; Mellon Bank in Pitsburg Pensylvania; and Cometick Bank in Detit, Michigan Some charsetrisics oti in with what you might expect—the very large barks (Mellon and Comerica) wh ther expertise made extensive use of off-balance shee det ives, while de small sitions di not use derivatives. The very large bans, through their aecose to global financial markets, tended to ase tare wholesale funding, while ‘he emaller Banke sed pinay customer funding, Tete ace exceptions evento Bese generalization. Foe example American Heritage had more bored fonds on a perezn gz basis than Mellor, and Overton hat rece leer! fonds purchased and repos than ‘ether Mellon or Comerica, Other characteristics in Table 2.4 vary widely. Fr example the propanon of ass in feral funds sod, sects, loans and leases, long-term ase, errand depos and equity capital varied witout any patter relted to size. Out begining conclosion stat ‘hile size may pemit more experise and acces francisl markets, the tering, factors for many characteristics depend ona bank's sategic plans and he ines of business. te tank chooses to emphasize, In Chapter 3. we will analyze retum and rs measures ‘or the ive banks in Table 24 in owe to shed more ligt onthe question: Is there a ‘ypical ben? AN INTRODUCTION TO LOAN LOSS ACCOUNTING Altwugh a thorough analysis of ean loss accountng isa legal and accousting nightmare, the basies can be claifed bya simple example. The reconciliation ofthe lan Ios resene accoonts for First National Bank in 200) appears in Tabe 2.5. Figure 2.1 gives an ilusras tion of the daa in Table 25. The reserves for loan loss balancxs ato yearend balance ‘hee gures rather than the average balances found in Table 2.1 The provision for lan losses figure canbe found inthe income statement in Table 22. The igure fractal lean losis less recoveries is par of the supplementary information ia Table 23. TABLE 2.5. First National Bani’: Reconciliation of Loan Loss Recounts (in thousands of dolars) Reserve fer loo lees, Dee $1, 2000 328 ‘aan Ieee ding 2001 eo coves ft grvius lan loses 2 Lenn letes les ecoveien 408 Passion fo bon oes i Reserve fr lat ote ee. 81,2001 336 a ‘Gapter 2+ Undersonting a Bank's Financial Statements FIGURE 2.1_ Simplified iustration of how loan loss accounting works ecoveres os proisen| Potent Toa, NPL ete = Resene was 3.124 on Desemin 1, 208, Recess ical psn Uy 12 200 an hatgea eco t by 49. To te gtr of 3% the Pv fr lov en Inco oneal expene—tal be 720. Fist National Hanh a reserve for loan loses of $3,124 milion as of December 31,2000. During the year, this reserve would be decreased bythe acta loan losses Fst [Naona charged off and increased by any recoveries of loans previously charged off Toward the end ofthe accounting ped there we asume its an annual period, But for ‘most banks its quarterly), Pst Nation makes an sddtional provision for loan losses to bring the period-nding reserve tothe desired level. This provision isan expense iim on the income statement and is usally deductible san expense establishing txable income, ‘The desired level of the ending reserve for nan losses should be based primarily ‘on managements knowledge of the curent loan poet, Specially, management mast contneally review problem loans and overall polio qty, cument end expected coo. nomic ard tnancla conditions, los experience relative to oustanding loans, and exaeing- tions by internal and ouside auditors and the regulatory amhories to determine the ae quay ofthis reserve (OFF-BALANCE SHEET INFORMATION During he late 1980s ant 19905, banks developed new meats of doing business hat cid not appear on their bslace shets as asses and Wabildes. Later we will sec tht these ‘off-balance sleet items may havea significant impact on bank retume and cok, At hs pain, some ofthe more common of-blance sheet ctv are introduced and possible Sources of information ae dscosed. ‘There are two broad eategcres of off-balance sheet infrmation. Te fist consists of activites that generate income or expenses without the ereation or holding ofan unde. lying asset o lib. A simple example would be cates in which the bank acted as 4 ‘broker (aking fe for arranging for funds tobe provided to borowers without making Tons o raising deposits) rather than asadeaer (making and holding leas andthe funding source), Other banking services, such 25 cash management, that generate fe income With ‘out requicing aes of Hails also fit inthe emery. ‘Thesecondeatgory of off-balance sheet activites involves the bank's commitments ‘and contingent claims. A commitment means that the bank commits to some flue aeton OE Balance Sheet Informa TABLE2.6. Primary Types of Of-Balance Sheet Commitments and Contingent Game 1. Fingal arate Stay letra eri Th nes of rede Revaving os som nnt of exit Bh Ateaparce pticiptions .Invesnen aes af i a Corey swaps and receives fee for making such a commitment. A contingent claim isan cligation by abank to take action (et lend fends ov buy secures) contingency i realized. The claim dos nt appest onthe balance shet unt it isexecised (2g, the foa is made ‘or the security i purchased), The bark however, asbally has undereriten an eblizaion (ofa thied pary and has icrerse income and taken tsk ‘Table 26 shows some more common commitments and contingent claims grouped into three ssbeategores: (1) financial guarantees, 2) wace France, and (3) investnent esis. Afnancial guarantee san undertaking by a bank (he guarnte) stand behind ‘he obligation of a tid party and to cary eu that obligation i he tied party als so so. For exampie, in standby lees of cred bank mus. pay the beneficiary ifthe \hird party deftals on a financial obligation of the pecformance contract. A line ef ered ‘sa wonfee informal grersentbewesn a bank anda customer tat the bark will ypically ‘make a lean up to the maximuen agreed amour o that customer unless conons have ‘hanged materially. In contast,a revolving foan agreement isa formal agreement between the bank and a customer that obligates the bank o lend funds according to We terms of the contract. Note issuance faiiles—Eoronotes, revolving. undectrting, facies (RUF), and standby note issuance facies (SNIFs)—and seeurization of ase ith recourse are other examples of nancial guarantees. ‘Trade finance inches commercial laters of eet and acceptance patcipatons, bath of which are used to finance imteratonal unde. A leer of credit involves a bank's (uaranee that ts customer will pay a contacial debt to a third pary. An acceptance arcipaton is all or part ofa banker's aceeptance (atime craft the originating bank bas agreed to pay at maturity that has been purchased and for which the purchasing bank Ins contingent abil Investment activities that donot appear on 2 bank's balance shet include derivative insromentssoch as forward commitments, financial futures, intrest rte swaps, options (puts, cals, collars), and cureney swaps. Chapters 13, 14 and 15 provide instiational mangzments and formal analyse of all these instruments and shows thatthe other off bance shet commitments and conngent claimssimilarly canbe conceived and analyzed as derivatives. A bank usully receives a fe or changes sk poston immediately for an activity tht does not appsaron the balance sheet now but for which the bank may 0 TABLE 27. Schedule RCL—Commitments nd Contingencies Please read eareuly the instruction fr the preparation of Schedule RCL Dolla Anouate in Thousands 6360 Bi | Mu Thow ‘Commitmis to make or pusbave bene or ec ten exe inthe for of se Bancing earge= tens fropo onl the unused pens of com tens that ae le pad or aeevice legally Finding). 2. Futures and ore ental erclade contra ine | ‘rng cen eochange 1 Comment PE nn 5. Cammineats oS heen seca: 2 Gras eoemiment to purchase 7 1. Grom commiiments to Sil 4. Shady cone ond ter opin arangeneas Obligations to prcbae ner ep Sones i. Obtains se under pon comrct 5. Commiment to puchae foreign erences and US aller exchenge Gt an low) 6 Suaby ete of eet 2 Sandy aver feed ) ToUS. adesces Comite nomen 12) Te non US. adressen nm) 3. Ama ef andy late fee {0} tnd 62) conveyed tothe hgh pariegatons 1. Commer nd sia ater of erat 1 Parc acpi he petion) come ae by he myn 9: isi pn ied insuteas) acquired by the report (oma pling Banke ne tanta 10, Secs bared eo 1. Severs len 12, Otber signin comatnents nd contngncin {at baw each eomponert ft em over 25% ef Sebedue RC, em 28. “Toal ey apt). bs ah Ba ah 20. 2 Memoranda 1, Loan originated by the opting bark that have teen cid articfpatd sees ring the elem di quater eading with the reper date encode the potions af sch Toa retained by te eparing bank ee insslos fb her exci) 2. Naina vals ofall estaningineest te seape Scones: Aladin Schl REL bythe Fader Fe Mi M2, Tesiunes Beton Conainon, Sources and Quay of Information have to take future actions. Othe aspects of off-balance sheet Invesment stv are

    You might also like