Case: First National Bank Corporation

First National Bank Corporation

1. The estimated net incomes and owners equities in the two scenarios is
calculated as follows. We assume that FNB would pay $76mil of dividend
during FY1990 regardless of its net income.

2. To estimate the appropriate level for the credit allowance, we adopted the
balance sheet-based approach by focusing on the relation between the
balance of loans and allowance. Income-statement approach doesnt
represent an economic reality especially during recession because decreased
revenue during recession would also reduce the amount of provision for the
current period.
We first divided the FNBs total loans into two category, normal and
nonperforming. Then we assume 1% allowance rate for the normal loans,
reflecting their lower credit risks, and divided historical allowance amounts
through 1986-1989 into two parts, one from normal loans and the other from
nonperforming loans. By doing this, we figured out the historical allowance
rate for nonperforming loans is 24%. Based on these allowance rate and loan
amounts, we estimated the credit allowance at the end of FY1990 to be
$518mil.

3. When estimating the balance for the credit loss allowance, there are
common factors that all of controller, CFO and auditor would consider such
as recent macro-economic condition, historical loss experience, and
possibility of litigations etc. In addition to these common factors,
controllers judgement could be also influenced by OCCs regulation and
internal compensation system. Similarly, the CFOs estimation would be
influenced by the companys stock price and recent financial performance,
expected response from the capital market, and incentive compensation plan
for them. On the other hands, for auditors, regulatory guideline such as
GAAP and GAAS, reputation and credibility as an external auditor, and
relationship with client could affect their estimation.