Kalewood Savings Bank has experienced recent changes in the composition of its deposit (see the following table; all figures in millions of dollars). What changes have recently occurred in Kalewood’s deposit mix? Do these changes suggest possible problems for management in trying to increase

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Kalewood Savings Bank has experienced recent changes in the composition of its deposit (see the following table; all figures in millions of dollars). What changes have recently occurred in Kalewood’s deposit mix? Do these changes suggest possible problems for management in trying to increase profitability and stabilize earnings?

Accepted Answer

		One	Two	Three
	This	Year	Years	Years
Types of Deposits Held	Year	Ago	Ago	Ago
Regular and special checking accounts	$235	$294	$337	$378
Interest-bearing checking accounts	392	358	329	287
Regular (passbook) savings deposits	501	596	646	709
Money market deposit accounts	863	812	749	725
Retirement deposits	650	603	542	498
CDs under $100,000	327	298	261	244
CDs $100,000 and over	606	587	522	495

Regular and special checking accounts have declined sharply from $378 million to $235 million, while interest-bearing checking accounts rose from $287 million to $392 million. Passbook savings deposits have fallen by more than $200 million while money-market deposit accounts, retirement accounts, and both small and large ($100,000 +) CDs have all risen substantially. Management has several reasons to be concerned about these developments because the bank’s funds are shifting into accounts bearing significantly higher interest costs, while the bank is suffering substantial erosion in its core deposits represented by regular (passbook) savings deposits and small checking accounts. Thus, more interest-sensitive funds are supplanting deposits that are more loyal and less interest-elastic. The bank may find its profits are likely to be squeezed by higher interest costs and its earnings may become more volatile if market interest rates experience significant changes in the period ahead because a greater portion of the bank’s funding is coming from more interest-sensitive deposits. A possible offsetting advantage is the shift away from deposits that can be withdrawn without notice (i.e., regular and special checking accounts and passbook savings deposits) toward longer-term deposit instruments with fixed maturities, giving the bank a somewhat longer term and, perhaps, somewhat more predictable funding base.

Question 12.P.2: Kalewood Savings Bank has experienced recent changes in the ...

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