4-62 (Lincoln Federal Savings and Loan) The following is a description of various factors that affected the operations of Lincoln Federal Savings and Loan, a California savings and loan (S&L) that was a subsidiary of American Continental Company, a real estate development company run by Charles Keating.
Required:
a. After reading the discussion of Lincoln Federal Savings and Loan, identify the risk areas that should be identified in planning for the audit.
b. Briefly discuss the risks identified and the implication of those risks for the conduct of the audit.
c. The auditor did review a few independent appraisals indicating the market value of the real estate in folders for loans. How convincing are such appraisals? In other words, what attributes are necessary in order for the appraisals to constitute persuasive evidence?
Lincoln Federal Savings & Loan
Savings and Loan industry background-the S&L industry was developed in the early part of the century in response to a perceived need to provide low-cost financing to encourage home ownership. As such, legislation by Congress made the S&L industry the primary financial group allowed low-cost home ownership loans (mortgages).
For many years, the industry operated by accepting relatively long-term deposits from customers and making 25- to – 30-year loans at fixed rates on home mortgages. The industry was generally considered to be safe. Most of the S&Ls (also known as thrifts) were small, federally chartered institutions with deposits insured by the FSLIC. “Get your deposits in, make loans, sit back, and earn your returns. Get to work by 9 A.M. and out to the golf course by noon” Seemed to be the motto of many S&L managers.,
Changing economic environment-During the 1970s, two major economic events hit the S&L industry. First, the rate of inflation had reached an all-time high. Prime interest rates had gone as high as 19.5%. Second, deposits were being drawn away from the S&Ls by new competitors that offered short-term variable rates substantially higher than current passbook savings rates. The S&Ls responded by increasing the rates on certificates of deposit to extraordinary levels (15 or 16%) while servicing mortgages with 20-to 30-year maturities made at old rates of 7 to 8%. The S&Ls attempted to mitigate the problem by offering variable-rate mortgages or by selling off some of their mortgages (at substantial losses) to other firms.
However, following regulatory accounting principles, the S&Ls were not required to recognize market values of loans that were not sold. Thus, even if loan values were substantially less than the book value, they would continue to be carried at book value as long as the mortgage holder was not in default.
Changing regulatory environment-Congress moved to deregulate the S&L industry. During the first half of 1982, the S&L industry lost a record $3.3 billion (even without marking loans down to real value). In August 1982, President Reagan signed the Garn-St Germain Depository Institutions Act of 1982, hailing it as “the most important legislation for financial institutions in 50 years.” The bill had several key elements:
• S&Ls would be allowed to offer money market funds free from withdrawal penalties or interest rate regulation.
• S&Ls could invest up to 40% of their assets in nonresidential real estate lending. Commercial lending was much riskier than home lending, but the potential returns were greater. In addition, the regulators helped the deregulatory fever by removing a regulation that had required a saving and loan institution to have 400 stockholders with no one owning more than 25% to allowing a single shareholder to own a savings and loan institution.
• The bill allowed thrifts to stop requiring traditional down payments and to provide 100% financing, with the borrower not required to invest a dime of personal money in the deal.
• The bill permitted thrifts to make real estate loans anywhere. They had previously been required to make loans on property located only in their own geographic area.
Click here for the solution: The following is a description of various factors that affected the operations of Lincoln Federal Savings and Loan
Showing posts with label loan. Show all posts
Showing posts with label loan. Show all posts
Sunday, September 6, 2015
Saturday, August 1, 2015
As loan analyst for Madison Bank, you have been presented the following information
E24-4 (Ratio Computation and Analysis; Liquidity) As loan analyst for Madison Bank, you have been presented the following information.
Plunkett Co. Herring Co.
Assets
Cash $ 120,000 $ 320,000
Receivables 220,000 302,000
Inventories 570,000 518,000
Total current assets 910,000 1,140,000
Other assets 500,000 612,000
Total assets $1,410,000 $1,752,000
Liabilities and Stockholders’ Equity
Current liabilities $ 300,000 $ 350,000
Long-term liabilities 400,000 500,000
Capital stock and retained earnings 710,000 902,000
Total liabilities and stockholders’ equity $1,410,000 $1,752,000
Annual sales $ 930,000 $1,500,000
Rate of gross profit on sales 30% 40%
Each of these companies has requested a loan of $50,000 for 6 months with no collateral offered. Inasmuch as your bank has reached its quota for loans of this type, only one of these requests is to be granted.
Instructions
Which of the two companies, as judged by the information given above, would you recommend as the better risk and why? Assume that the ending account balances are representative of the entire year.
Click here for the solution: As loan analyst for Madison Bank, you have been presented the following information
Plunkett Co. Herring Co.
Assets
Cash $ 120,000 $ 320,000
Receivables 220,000 302,000
Inventories 570,000 518,000
Total current assets 910,000 1,140,000
Other assets 500,000 612,000
Total assets $1,410,000 $1,752,000
Liabilities and Stockholders’ Equity
Current liabilities $ 300,000 $ 350,000
Long-term liabilities 400,000 500,000
Capital stock and retained earnings 710,000 902,000
Total liabilities and stockholders’ equity $1,410,000 $1,752,000
Annual sales $ 930,000 $1,500,000
Rate of gross profit on sales 30% 40%
Each of these companies has requested a loan of $50,000 for 6 months with no collateral offered. Inasmuch as your bank has reached its quota for loans of this type, only one of these requests is to be granted.
Instructions
Which of the two companies, as judged by the information given above, would you recommend as the better risk and why? Assume that the ending account balances are representative of the entire year.
Click here for the solution: As loan analyst for Madison Bank, you have been presented the following information
Saturday, July 11, 2015
The president of the retailer Prime Products has just approached the company’s bank with a request for a $30,000, 90- day loan
Problem 9-21 The president of the retailer Prime Products has just approached the company’s bank with a request for a $30,000, 90- day loan. The purpose of the loan is to assist the company in acquiring inventories. Because the company has had some difficulty in paying off its loans in the past, the loan officer has asked for a cash budget to help determine whether the loan should be made. The following data are available for the months April through June, during which the loan will be used:
a. April 1, the start of the loan period, the cash balance will be $24,000. Accounts receivable on April 1 will total $140,000, of which $120,000 will be collected during April and $16,000 will be collected during May. The remainder will be uncollectible.
b. Past experience shows that 30% of a month’s sales are collected in the month of sale, 60% in the month following sale, and 8% in the second month following sale. The other 2% represents bad debts that are never collected. Budgeted sales and expenses for the three-month period follow:
April May June
Sales (all on account) $300,000 $400,000 $250,000
Merchandise Purchases $210,000 $160,000 $130,000
Payroll $20,000 $20,000 $18,000
Lease Payments $22,000 $22,000 $22,000
Advertising $60,000 $60,000 $50,000
Equipment Purchases --- --- $65,000 (nothing in the first 2 months)
Depreciation $15,000 $15,000 $15,000
c. Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases during March, which will be paid during April, total $140,000
d. In preparing the cash budget, assume that the $30,000 loan will be made in April and repaid in June. Interest on the loan will total $1,200.
Requirement 1:
Prepare a schedule of expected cash collections for April, May, and June, and for the three months in total. (Deficiencies should be preceded by a minus sign when appropriate. Enter all other amounts as positive values. Leave no cells blank - be certain to enter "0" wherever required. Omit the $ sign in your response.)
Requirement 2:
Prepare a cash budget, by month and in total, for the three-month period. (Negative amounts should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Omit the $ sign in your response.)
Requirement 3:
If the company needs a minimum cash balance of $20,000 to start each month, can the loan be repaid as planned?
Click here for the solution: The president of the retailer Prime Products has just approached the company’s bank with a request for a $30,000, 90- day loan
a. April 1, the start of the loan period, the cash balance will be $24,000. Accounts receivable on April 1 will total $140,000, of which $120,000 will be collected during April and $16,000 will be collected during May. The remainder will be uncollectible.
b. Past experience shows that 30% of a month’s sales are collected in the month of sale, 60% in the month following sale, and 8% in the second month following sale. The other 2% represents bad debts that are never collected. Budgeted sales and expenses for the three-month period follow:
April May June
Sales (all on account) $300,000 $400,000 $250,000
Merchandise Purchases $210,000 $160,000 $130,000
Payroll $20,000 $20,000 $18,000
Lease Payments $22,000 $22,000 $22,000
Advertising $60,000 $60,000 $50,000
Equipment Purchases --- --- $65,000 (nothing in the first 2 months)
Depreciation $15,000 $15,000 $15,000
c. Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases during March, which will be paid during April, total $140,000
d. In preparing the cash budget, assume that the $30,000 loan will be made in April and repaid in June. Interest on the loan will total $1,200.
Requirement 1:
Prepare a schedule of expected cash collections for April, May, and June, and for the three months in total. (Deficiencies should be preceded by a minus sign when appropriate. Enter all other amounts as positive values. Leave no cells blank - be certain to enter "0" wherever required. Omit the $ sign in your response.)
Requirement 2:
Prepare a cash budget, by month and in total, for the three-month period. (Negative amounts should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Omit the $ sign in your response.)
Requirement 3:
If the company needs a minimum cash balance of $20,000 to start each month, can the loan be repaid as planned?
Click here for the solution: The president of the retailer Prime Products has just approached the company’s bank with a request for a $30,000, 90- day loan
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