Bank Management 5th Edition Timothy W. Koch, S. Scott Macdonald - Solutions

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If you invest $1,000 today ina security paying 8 percent compounded quarterly, how much will the investment be worth seven years from today?
Describe the components of a balanced scorecard as applied to a community bank. What is the basic motivation for creating a balanced scorecard as a management tool?
What does EVA measure for a bank? What would a negative value for EVA mean for a bank or for a specific line of business within a bank?
According the the data in Exhibit 4.5 for Bankers Trust, which type of risk(risk class) represented the greatest exposure to the firm at year-end 1997?What does the term “diversification” refer to when measuring value-at-risk for the overall portfolio?
Explain how the value-at-risk measure provides meaningful information to senior management when analyzing market risk.
Why do U.S. bank regulations impose specific capital requirements against large banks’ market risk?
What is the specific purpose of a bank’s internal funds transfer pricing system?
Use the data from Exhibit 4.1 for PNC to explain:a. Why the return on assigned capital fell from 1996 to 1997 for the Na- tional Consumer Banking division.b. Why the return on assigned capital for Regional Community Banking exceeded that for National Consumer Banking in 1997.c. Which of the seven
What is the relevance of earnings-at-risk and value-at-risk for a specific line of business, such as commercial lending?
Why is it important to conduct line of business profitability analysis?
How does RAROC differ from RORAC?
Explain how the Customer Bank differs from the House Bank when ana- lyzing a bank's performance. What types of assets, liabilities, revenues, and expenses would fall under the Customer Bank? What types would fall un- der the House Bank?
Suppose that you are an investor in bank stocks. Describe why each of the following might be important information for you to make an informed investment decision regarding whether to buy or sell a specific bank's stock.a. Bank's market share of core depositsb. Bank's market share of consumer
Use the following information for Manor Bank (MB) at year-end to calculate the performance measures listed.
When calculating a bank’s earnings per share (EPS), what is the appropriate measure of earnings? Over what time period should earnings be measured?
List the steps that a bank stock analyst typically follows in making a recommendation to investors concerning a specific bank’s stock.
What does the term “whisper earnings” refer to in the context of stock valuation?
Suppose that you own stock in Trident Bank. Last year, the bank reported ROA = 0.95 percent, ROE = 13.47 percent, and Return to Stockholders= —5.25 percent. Did this bank perform well or poorly during the year?
In each of the following situations, indicate why ROE or ROA might not be comparable across Bay Bank and Cove Bank.a. Both banks have $5 billion in assets.b. Bay Bank has a large trust department and Cove Bank does not.c. Cove Bank lends to large, Fortune 500 companies. Bay Bank lends to small
List three weaknesses of basic GAAP-based financial performance measures. Explain why each represents a weakness.
The summary UBPR page for First National Bank is shown on page 150.Average total assets for First National were $208.858 million and total equity was $17.539 million as of March 31, 1998. Use the data from March 31, 1998, to explain whether this bank was a high or low performance bank. Discuss
Evaluate the performance of Community National Bank relative to peer banks using the data in Exhibits 3.1, 3.3, 3.5, 3.6, and 3.7. Did the bank perform above or below average that year? Did it operate with more or less relative risk?a. Conducta return on equity decomposition analysis for the year
Explain how each of the following potentially affects a bank’s liquidity risk:a. Most (95 percent) of the bank’s securities holdings are classified as heldto-maturity.b. The bank’s core deposit base is a low (35 percent) fraction of total assets.c. The bank’s securities all mature after
Suppose that your bank had reported a substantial loss during the past year. You are meeting with the bank’s board of directors to discuss whether the bank should make its traditional (25 years straight) dividend payment to common stockholders. Provide several arguments that the bank should
In some instances, when a bank borrower cannot make the promised principal and interest payment on a loan, the bank will extend another loan for the customer to make the payment.a. Is the first loan classified as a nonperforming loan?b. What is the rationale for this type of lending?c. What are the
What ratios on common-sized financial statements would indicate a small bank versus a large, multibank holding company? Cite at least five.
In each pair below indicate which asset exhibits the greatest credit risk. De- scribe why.a. Commercial loan to a Fortune 500 company or a loan to a corner grocery
Rank the following assets from lowest to highest liquidity risk: 3-month Treasury bills 1-year construction loan 4-year car loan with monthly payments 5-year Treasury bond 5-year municipal bond 1-year individual loan to speculate in stocks 3-month Treasury bill pledged as collateral
Regulators use the CAMELS system to analyze bank risk. What does CAMELS stand for and what financial ratios might best capture each factor?
Explain why profitability ratios at small banks typically differ from those at the largest money center banks.
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Define each of the following components of the Return on Equity model and discuss their interrelationships:a. ROEb. ROA
Bank L operates with an equity-to-asset ratio of 5 percent, while Bank S op- erates with a similar ratio of 8 percent. Calculate the equity multiplier for each bank and the corresponding return on equity if each bank earns 1.5 percent on assets. Suppose, instead, that both banks report an ROA of
What are the primary sources of risk facing bank managers? Describe how each potentially affects bank performance. Provide one financial ratio to measure each type of risk and explain how to interpret high versus low val- ues.
Arrange the following items into an income statement. Label each item, place it in the appropriate category, and determine the bank’s bottom line net income.Interest paid on time deposits under $100,000 = $72,000 Interest paid on jumbo CDs = $101,000 Interest received on U.S. Treasury and agency
Using PNC in Exhibit 3.1 as a typical large bank, which balance sheet accounts would be affected by the following transactions? Indicate at least two accounts with each transaction.a. Arturo Rojas opens a money market deposit account with $5,000. The funds are loaned in the overnight market for one
Banks typically differentiate between interest and noninterest income and expense. What are the primary components of each? Define net interest income and burden. What does a bank’s efficiency ratio measure?
What are the major categories of bank assets and their approximate percentage contribution to total resources? What are the major categories of bank liabilities? What are the fundamental differences between them?
There are many proponents of Universal Banking in the United States.What is Universal Banking? What laws prevent Universal Banking in the United States? Outline the pros and cons to Universal Banking. Do you think the United States should allow banks to provide any service? Why or why not?
What banks headquartered out-of-state have a major presence in your state? List their competitive advantages and disadvantages versus in-state banks. What nonbank banks offer competing products in your market?Make a list of which firms will allow you to open a checking account.Which firms will
What are the duties of outside members of a bank's board of directors? To whom are directors responsible?
Is the purpose of bank regulation to prevent bank failures?
Why might banking regulators prohibit banks from underwriting insur- ance products? Why might they prohibit banks from buying real estate as- sets as an investment? Determine whether current banking law has changed or is expected to change to allow Citigroup (Citicorp and Trav- elers merger) to
Describe five levels of management typically found in an independent bank. Which level do you think is the most important? Why?
Exhibits 2.13 and 2.14 document the share of in-state deposits held by out- of-state bank holding companies. Find the state where you live. Explain why the share listed is high, low, or in the middle. Discuss recent trends in bank mergers and acquisitions within your state.
Why were commercial banks prohibited from underwriting corporate se- curities within the United States but not abroad? How can a bank engage in underwriting corporate securities today?
What does the acronym CAMELS refer to in bank examinations? What are the most important facets of an examination?
Federal deposit insurance used to cover a maximum of $40,000 per eligible account. It was later raised to $100,000 per account. What cost and or risk did this present to the FDIC? What role, if any, did this play in the banking industry's problems during the 1980s?
What are the basic objectives of banking regulation? How do regulators at- tempt to achieve these objectives?
Explain why there are so many different bank regulatory agencies. Devise a regulatory structure that would improve the existing system.
Exhibit 2.2 documents the sharp drop in financial assets controlled by de- pository institutions. Explain why banks are losing market share. What must happen for them to reverse this trend? Explain why mutual funds and pension funds are increasing their market shares.
Will specialty or small community banks be able to compete successfully with larger commercial banks now that interstate banking is allowed? Will small community banks be able to compete successfully with firms such as Merrill Lynch, Charles Schwab, BankAmerica, Bank One, and Household
What are the basic assets and liabilities of a multibank holding company?In what form does a holding company generate income?
What are the advantages of a bank having many branches in a city or state as opposed to just one main office location? What are the disadvantages?
Many experts argue that banking has been extremely vertically integrated.Vertical integration is the degree to which a company creates all parts of its product or the degree to which it distributes and sells those products itself.It seems likely that the degree of vertical integration will fall
Do out-of-state banks have a major presence in your state and local area? Are there any foreign banks in your state? In each case identify the strengths and weaknesses of each type of bank.
How many commercial banks, savings and loans, and credit unions were there in your hometown five years ago? How many are there today? Why has the number changed? Has the range of services from the current institutions changed?
Which banks in your area seem to have best adapted to change? What criteria will you use to decide? Which nonbank financial firms compete aggressively in your area? Do they operate with any advantages or disadvantages versus banks? What about financial services available on the Internet? What
Much of the intense competition in the financial services industry comes from products that are the most standardized, such as mortgages, automo- bile loans, money market accounts, savings accounts, and so on. These products will offer very low profit margins. If you managed a small com- munity
What are the basic arguments for increasing capital requirements at banks? In what ways will bank depositors, stockholders, and society in general benefit? How might each group be disadvantaged? As banks enter new lines of business such as brokerage, how much additional capital should be required.
In what areas do captive finance companies and other finance companies compete with banks? Who has the advantage?
Globalization results in more efficient financial markets. Why do some bankers fear globalization? Will globalization have a different impact on community banks than nationwide banking organizations?
Some analysts contend that the federal government plays a game of catch- up in reregulation. Bankers start the game by offering new and creative products that circumvent existing regulations. Regulators try to catch up by eliminating or rewriting old rules to reflect the new situation. Meanwhile,
The factors involved in the changing banking field are highly interrelated.In the organizational scheme shown below, consolidation of the industry is the ultimate effect of a series of causes. Some banking writers contend that the ultimate effect is not consolidation, but globalization. Redraw the
Explain how technology has dramatically increased competition in banking. Do you agree that Microsoft is a competitive threat? Explain.
Explain how the growth in commercial paper and junk bonds has affected commercial lending and yield spreads at banks.
What problems are likely to arise when a bank tries to securitize: mortgages, credit card loans, automobile loans and small business loans.
Suppose that you are the president of a commercial bank in a town of 22,000 residents. There are five other banks, two savings and loans, and a credit union. Your town also has Internet access in which the residents can access services from a number of national banking organizations, and a range of
Describe the basic services provided by investment banks. Why are large commercial banks eager to offer investment banking services domestically?
Change is always good for some participants and bad for others. Which types of banks appear best situated to gain from increased competition in the financial services arena? Which banks seem most likely to lose?
What impact is securitization likely to have on the quality of assets that banks keep in their portfolios?
Many experts argue that it was not deregulation that brought about fundamental change in the banking industry — rather increases in competition from all providers of financial services. Many argue that deregulation was a response to increased competitive pressures. Outline the fundamental
2. There are many proponents of expanding the types of activities allowed banks in the United States. Do you think the United States should allow banks to provide any service? What are the primary advantages of expanded powers? What are the primary disadvantages? Choose a large multibank holding
1. What banks headquartered out-of-state have a major presence in your state? List their competitive advantages and disadvantages versus in-state banks. What nonbank banks offer competing products in your market? Make a list of which firms will allow you to open a checking account. Which firms will
16. Outline the major provisions of the Gramm-Leach-Bliley Act of 1999. Many experts considered this bill to favor larger multibank holding companies. What are some of the advantages or disadvantages of this bill to the largest and smallest banks? Do you think this bill will hasten the reduction in
15. What are the duties of outside members of a bank’s board of directors? To whom are directors responsible?
14. Is the purpose of bank regulation to prevent bank failures?
13. Why might banking regulators prohibit banks from underwriting insurance products?Why might they prohibit banks from buying real estate assets as an investment?Determine whether current banking law has changed or is expected to change to allow Citigroup (Citicorp and Travelers merger) to remain
12. Describe five levels of management typically found in an independent bank. Which level do you think is the most important? Why?
11. Exhibits 2.16 and 2.17 document the share of in-state deposits held by out-of-state bank holding companies. Find the state where you live. Explain why the share listed is high, low, or in the middle. Discuss recent trends in bank mergers and acquisitions within your state.
10. Why were commercial banks prohibited from underwriting corporate securities within the United States but not abroad? How can a bank engage in underwriting corporate securities today?
9. What does the acronym CAMELS refer to in bank examinations? What are the most important facets of an examination?
8. Federal deposit insurance used to cover a maximum of $40,000 per eligible account. It was later raised to $100,000 per account. What cost and/or risk did this present to the FDIC? What role, if any, did this play in the banking industry’s problems during the 1980s?
7. What are the basic objectives of banking regulation? How do regulators attempt to achieve these objectives?
6. Explain why there are so many different bank regulatory agencies. Devise a regulatory structure that would improve the existing system.
5. Exhibit 2.4 documents the sharp drop in financial assets controlled by depository institutions.Explain why banks are losing market share. What must happen for them to reverse this trend? Explain why mutual funds and pension funds are increasing their market shares.
4. Will specialty or small community banks be able to compete successfully with larger commercial banks now that interstate banking is allowed? Will small community banks be able to compete successfully with firms such as Merrill Lynch, Charles Schwab, Bank of America, BankOne, and Household
3. What are the primary differences between a bank holding company and a financial holding company?
2. What are the basic assets and liabilities of a multibank holding company? In what form does a holding company generate income? :
1. What are the advantages of a bank having many branches ina city or state as opposed to just one main office location? What are the disadvantages?
Il. PERFORMANCE OF CHEM-CO COATINGS Table 1 presents balance sheet and income statement data for Chem-Co, a producer of specialty chemical coatings, that recently bought a small manufacturer of outdoor pools. During 2001 the firm instituted a national marketing campaign to inform individuals of the
1. In preparing to go to the bank for the necessary loan, the Mayalls want to prepare projected financial statements for Southwest Trading Company showing the company can make a profit and pay back the loan. They also want to know more precisely how much they will need to borrow from the bank to
1. They have informal commitments from local craftsmen to supply them with goods that they will display and sell. They have also made tentative arrangements with a large and reliable firm to supply the furniture and art pieces they will need to run the business.The Mayalls have decided to open a
I. SOUTHWEST TRADING COMPANY, TAOS, NEW MEXICO.Summer is approaching and Steven and Sue Mayall have finally decided that their idea of a successful southwest furniture, art, and jewelry trading company has come of age. They know that summer is a popular tourist time in New Mexico and could be the
10. Develop a list of questions that a loan officer should ask Marcus Wade, from the example in the text, to gain a better understanding of the risks in lending to Wade's Office Furniture.
9. Suppose that you have generated the estimates listed below from a pro forma analysis for a manufacturing company that had requested a 3-year term loan. The loan is a $1.5 million term loan with equal annual principal payments. Principal and interest are payable at the end of each year with
8. Should a firm’s cash flow from operations generally exceed capital expenditures?
7. Suppose that you generate a cash-based income statement and determine that cash flow from operations equals 75 percent of cash dividends paid and payments on current maturities of long-term debt. What is the significance of this in terms of the firm’s cash flow position? :
6. Indicate whether each of the following is a source of cash, use of cash, or has no cash impact.a. Firm issues new long-term debtb. Firm prepays operating costsc. Because a firm buys another firm it amortizes goodwilld. Firm sells outdated computer equipmente. Firm pays a stock dividendf. Firm
5. Explain how it is possible for a firm to report rising net income each year yet continue to need more working capital financing from a bank.

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Bank Management 5th Edition Timothy W. Koch, S. Scott Macdonald - Solutions

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