Managing Sources and Uses of Funds

As a consultant, you have been asked to assess a bank’s sources and uses of funds and to
offer recommendations on how it can restructure its sources and uses of funds to improve its
performance. This bank has traditionally focused on attracting funds by offering certificates of
deposit. It offers checking accounts and money market deposit accounts, but it has not
advertised these accounts because it has obtained an adequate amount of funds from the
CDs. It pays about 3 percentage points more on its CDs than on its MMDAs, but the bank
prefers to know the precise length of time it can use the deposited funds. (The CDs have a
specified maturity whereas the MMDAs do not.) Its cost of funds has historically been higher
than that of most banks, but it has not been concerned because its earnings have been
relatively high. The bank’s use of funds has historically focused on local real estate loans to
build shopping malls and apartment complexes. The real estate loans have provided a very
high return over the last several years. However, the demand for real estate in the local area
has slowed.

a. Should the bank continue to focus on attracting funds by offering CDs, or should it
push its other types of deposits?

b. Should the bank continue to focus on real estate loans? If the bank reduces its real
estate loans, where should the funds be allocated?

c. How will the potential return on the bank’s uses of funds be affected by your
restructuring of the asset portfolio? How will the cost of funds be affected by your
restructuring of the bank’s liabilities?