Lincoln National Bank Case Analysis
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I. Statement of the Problem
Lincoln national bank had large loan losses in 1980’s, Mr. Vigil, the CFO didn’t want to repeat the mistakes LNB had in the past and want to create precautionary measures and avert future risks.
II. Objectives of the problem
The objective is to help LNB review its past performance to avoid future problems and also to help the bank maximize shareholder’s wealth.
III. Areas of consideration
a. One area that needs to be considered is Credit risk or the potential variation in net income and market value of equity resulting from non-payment or delayed payment on loans and securities. If many borrowers’ loans defaulted then the interest income of the bank will decrease and it will not maximize profitability.
b. Another area that needs to be considered is the liquidity risk or the variation in net income and market value of equity caused by a bank’s difficulty in obtaining cash at a reasonable cost from either the sale of assets or new borrowings.
c. Last area to be considered is the Operational risk or the measurement of the cost efficiency of the bank’s activities; i.e., expense control or productivity; also measures whether the bank has the proper procedures and systems in place. LNB has an above-average personnel expense per employee. There is no meaningful way to estimate the likelihood of fraud or other contingencies from published data. A bank’s operating risk is closely related to its operating policies and processes and whether it has adequate controls.
IV. Alternative Courses of Action
1. First alternative course of action is to have a strong credit policies and control to up its standards and requirements before lending money to the borrower to avoid facing default problems. One advantage is to avoid lending money to illiquid borrower and also there will be provisions and allowance to net loss. The disadvantage is the bank will not be able lend money easily without checking the borrowers capacity to pay.
2. Second Alternative Course is to sell excess funds if it is liquid. The advantage is that the income gain income and if the income is great then there is growth and growth means expansion. If a bank aggressively selling security holdings and continues to grow then the bank can borrow in Fed funds. The bank can easily borrow Fed funds because it is liquid and can easily sell its loans. The disadvantage is that if there are many branches then the personnel expenses are high.
3. Lastly there is improvement of the operation system by installing a wide area network and a new teller system and change the old computer main-frame with a turnkey AS400 processing system designed for community bank. The advantage is it will improve the service and productivity of the bank. The main concern for this is the transition from the previous to this system to the new one.
We recommend for the realization of the 3 alternatives to create Asset-Liability committee or ALCO that will guide to control and maximize overall profitability while maintaining sound liquidity and capital adequacy with prudent management risk.