Business — Banking — Management — Marketing & Sales

Management Discussion and Analysis

Category: Corporate Governance

In the MD&A, banks disclose the potential impact of currently known trends, events and uncertainties that are reasonably likely to have material effects on a bank’s financial condition or results of operations. Irrespective of the terminology used in different countries to describe this type of disclosure, this qualitative information about operations and financial conditions is a critical component of information that public entities provide to the markets.

The main requirement to this voluntary information is to be in conformity with facts and conclusions contained in the audited set of financial statements.


Below is provided the extract from the MD&A section of the 2002 annual report of the National City Corporation (top 10 bank in the United States), as an example of MD&A disclosure as relates to the discussion of non interest expenses.

Non-interest expense

Details of noninterest expense follow:

(In Thousands) 2002 2001 2000
Salaries, benefits and other $1,865,480 $1,710,309 $1,627,260
Equipment 245,431 238,956 229,476
Net occupancy 225,044 212,780 209,229
Third-party services 239,083 203,762 197,485
Card processing 210,891 198,928 167,657
Marketing and public relations 146,138 71,348 83,747
Postage and supplies 127,781 128,345 121,453
Goodwill and other intangible 21,159 85,622 87,961
asset amortization
Telecommunications 85,565 84,568 81,301
Travel and entertainment 61,221 57,553 59,505
State and local taxes 61,538 52,416 39,136
Other real estate owned 24,292 8,373 543
Other 416,011 291,916 279,156
Total noninterest expense $3,729,634 $3,344,876 $3,183,909

Noninterest expense was $3.7 billion in 2002, compared to $3.3 billion in 2001 and $3.2 billion in 2000. In general, the increases in noninterest expense over the past two years reflected higher personnel, processing, and operational costs associated with increased business volumes and various brand development, technology, and service quality initiatives.

Salaries, benefits, and other personnel expense increased in both 2002 and 2001 primarily due to a higher level of commissions and contract labor costs associated with mortgage loan origination and sales activity. Employee benefit-related expenses rose in both years due to higher costs associated with medical benefits, an increase in contributions to 401 (k) plan participants and, in 2002, a reduction in the net periodic benefit earned related to the Corporation’s defined benefit pension plan. The Corporation expects the net periodic pension benefit to decrease to approximately $15.7 million in 2003 due to a decline in the fair value of plan assets related primarily to the decline in the equity markets. Further discussion of the Corporation’s benefit plans is included in Note 22 to the consolidated financial statements. The Corporation also plans to begin expensing stock options in 2003, as discussed in Note 2 to the consolidated financial statements, and estimates the associated pretax cost will be approximately $18 million. National City’s staffing level on a full-time equivalent basis was slightly higher than at the end of 2001 as increases in staff to support the record level of mortgage banking activity were mostly offset by personnel reductions resulting from efficiencies achieved across the Corporation and operational changes at National Processing. The decline in staff from 2000 to 2001 was associated with divestitures at National Processing.

Equipment and net occupancy expenses increased in both 2002 and 2001 in conjunction with investments made to improve processing and communications equipment within the branches and back office of the retail banking network.

Third-party services expense rose in both 2002 and 2001 primarily due to an increase in activities outsourced related to the significant increase in mortgage banking volumes and, to a lesser extent, increases in regulatory examination fees, payment processing referral fees, and professional service fees.

The increases in card processing expense in 2002 and 2001 were driven mainly by volume increases in payment processing activity at National Processing and increases in credit and debit card usage by retail banking customers.

Amortization expense associated with intangible assets declined in 2002 due to the adoption of Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Other Intangible Assets. Upon adoption on January 1, 2002, the Corporation ceased ratably amortizing its goodwill into the income statement. Further discussion of the adoption of SFAS 142 and detail of goodwill and other intangible assets is included in Note 9 to the consolidated financial statements.

Marketing and public relations expense in 2002 included a $52.8 million charge related to the donation of appreciated investment securities to the Corporation’s charitable foundation. Excluding this charge, marketing and public relations expense increased due to costs associated with a brand awareness campaign, which included targeted television and print advertising across the National City footprint.

State and local tax expense increased in 2002 due primarily to an increase in franchise taxes paid by the Corporation’s subsidiary banks as a result of higher capital levels. State and local tax expense was reduced in 2000 by the receipt of several tax refunds.

Other real estate owned expense is comprised of costs associated with maintaining and selling properties held for sale which were either obtained in satisfaction of nonperforming loans or were formerly used as bank premises. Also included in expense are any disposition gains and losses resulting from the sale of these assets, as well as any write-downs in the estimated fair values of such properties while they are held for sale. Other real estate owned expense has increased over the past two years as a result of an increase in the amount of other real estate owned, principally resulting from residential mortgage foreclosures.

Other noninterest expense in 2002 increased due primarily to losses related to the revaluation of community development and civic partnership investments, which totaled $67.6 million in 2002, compared to $7.1 million in 2001, a $15.9 million loss incurred in 2002 upon the consolidation of an asset-backed commercial paper conduit, higher expenses associated with mortgage banking activities, and increases in minority interest expense and fraud losses. Somewhat offsetting the increase in other expense in 2002 was a decline in write-downs taken on automobile lease residual values, which totaled $50.9 million in 2002 compared to $67.4 million in 2001. Noninterest expense in 2000 included $41.0 million of automobile lease residual value write-downs and an $18.0 million charge related to closing certain nonconforming retail and wholesale loan origination units and ceasing the origination of automobile leases.

The efficiency ratio, which expresses noninterest expense as a percentage of tax-equivalent net interest income and total fees and other income, was 55.1% for 2002, down from 55.7% in 2001 and 58.8% in 2000. Over the past two years, the Corporation’s efficiency ratio has improved due to revenue growth and cost management across all business lines.

Under all of the approaches this disclosure is viewed as fulfilling several important objectives:

First, MD&A-type disclosure enables shareholders and investors to see the bank «through the eyes of management.»

Second, MD&A-type disclosure improves financial disclosure overall and provides the context within which financial statements should be analyzed. Third, MD&A-type disclosure provides information about the different components of earnings and cash flow and the extent to which they are recurring elements, thereby enabling shareholders and investors to make a better prediction about the sustainability of earnings and cash flow in the future.

Fourth, MD&A-type disclosure provides information about the risks to a bank’s earnings and cash flow.

The following principles are the useful guidance for banks in preparing MD&A-type disclosure and for regulators in reviewing such disclosure:

MD&A-type disclosure should highlight the most relevant information.

MD&A-type disclosure should be clear, concise and meaningful, and in plain language.

MD&A-type disclosure should be presented in a format that will enhance the comprehensibility of the financial statements to shareholders, as well as to other users of this information, such as investment advisors and rating agencies.

Irrespective of whether it is provided as a separate report or included as part of a periodic report, MD&A-type disclosure should be provided at the same time as the presentation of the relevant financial statements.

Precautions when preparing MD&A-type disclosure in order to satisfy these objectives:

Care should be taken to avoid the use of complicated language that appears to be in technical compliance with disclosure requirements, but that nonetheless fails to provide shareholders/investors with appropriate information they need to make valuation and investment decisions.

MD&A-type disclosure should be properly crafted to address a bank’s specific situation. This will increase the overall quality of financial reporting, and assure material correctness and completeness of financial reporting regardless of the detailed accounting and financial requirements applied.

MD&A-type disclosure should provide an objective analysis that may require the disclosure of information that could reflect negatively on the company’s financial condition, changes in financial condition and results of operations.


Strategic Finance Magazine, the official magazine of the Institute of Management Accountants, has surveyed 140 sell-side star analysts to find out what analysts really want in doing their work.

The financial analysts came from a group honored as All-Star Analysts by The Wall Street Journal or as members of the All-America Team by Institutional Investor magazine.

Half the star analysts believe that the current disclosures by corporations are inadequate to facilitate an increased role of investors in corporate governance.

An overwhelming majority of the analysts, 91%, believe they are getting the information they need to forecast future financial performance, but only 41% believe that they receive the information necessary to diagnose the source of any company problems if the strategy is ineffective

Most analysts do find annual reports an important source of information. The management discussion and analysis (MD&A) section and most other parts are well read and used. One notable exception is the balance sheet that analysts often perceive as irrelevant because of its reliance on historical costs and arbitrary write-offs of intangible assets.

More than 85% of the analysts said they would like more information on key business risks and uncertainties, financial liquidity and flexibility, the competitive strategy of the significant business units, and an identification of the corporate strategy. Another item that star analysts want is a budgeted income statement for the coming year with an earnings forecast included in the MD&A section. This result is also consistent with other results related to the importance of MD&A.

Thirty-five percent of the analysts have difficulty understanding the footnotes, and 55% would like further explanation of the footnotes. 18% of the analysts had trouble understanding the statement of cash flows, and 34% would like further explanation of this financial report. Some 49% would like further explanation of the MD&A.

The bottom line is that financial analysts want companies to be more forthcoming with their financial information and provide more voluntary disclosures that «tell the corporate story» to external users.

« ||| »

Tagged as:

Comments are closed.