money & banking ( group project)/Case Study of a Depository Institution and the Recent Financial Crisis.Focus: how your specific depository institution (bank) contributed to and was impacted by the recent financial crisis. The time period of your case study is mainly the eleven-year period, 2003-2013. Your financial ratio analysis will focus on two sub-periods: the four-year period before the crisis (2003-2006) and the four-year period after the crisis (2010-2013). (Note: the housing boom started around 2000 and the bust started around 2006-2007.) While your detailed financial ratio analysis will focus on the pre-crisis and post-crisis periods, your report should also discuss the crisis period (2007-2009) and how your bank contributed to and/or was impacted by the crisis. Your analysis should also include a brief discuss of the current financial health of your bank (as of 2013), supported, whenever possible by the results of your financial ratio analysis.
Introduction: Historical Profile and Plan of Study

The introduction briefly sketches the background or history of the depository institution (bank) and includes information about the mission, bank objectives, and the bank’s present situation. Again, this section is relatively brief.

This introductory section concludes with a brief transition paragraph describing the purpose of the report and how the report is organized, i.e., lay out in general terms the remaining sections in the rest of the report. The purpose of this paragraph is to provide the reader with an idea of what to expect in this paper.
Financial Industry OverviewLate 1990s to the Present

This section focus on the financial industry environment in which your bank operates Discuss some of the recent changes (since the late 1990s or so) that have occurred or are taking place in the macro environment (technological, macroeconomic, political/legal, global, and social) that have had an impact, either positive or negative, on the financial industry in general and depository institutions in particular. Remember, the focus is on the banking industry, not just your specific bank. (You may want to get the SIC and NAICS codes for your bank and research the recent history of the financial industry.) In particular, discuss any financial innovations and technological changes that have been important in the banking industry.

Recent Monetary Policy, Regulatory Framework, and Banking Practices

Briefly review Federal Reserve monetary policy regarding the various tools and targets of monetary policy. You can include a normative analysis that includes your assessment (view) of whether Fed policy was too easy or tight in the years leading up to the financial crisis. (Be sure to include quantitative measures of monetary policy targets to support your views.)

Briefly discuss any significant SEC, FDIC, or Fed rulings that have impacted the depository institutions. Were there any important laws recently passed? What about changes in the mortgage industry? (You will want to read chapter 10 in Mishkin (2016).)

Analyses of Bank’s Financial Statements and Ratios.

Prepare your financial analysis of your bank or financial institution using charts for the pre-crisis (2003-2006) and post-crisis (2010-2013) sub-periods. Be sure to use both historical and industry comparisons. The objective of this important section is a quantitative assessment of your banks financial statements in the pre- and post-crisis periods. Wherever possible, your bank’s position should be compared to industry averages. There are two main parts to the analysis of financials – a vertical analysis of financial statements and an analysis of financial ratios.
A. Vertical Analysis of Your Bank’s Financial Statements

Review of Vertical and Common-Size Statements
Vertical or Common-size statements derive from the problems in comparing the financial statements of firms that differ in size. In the balance sheet, for example, the assets as well as the liabilities and equity are each expressed as a 100% and each item in these categories is expressed as a percentage of the respective totals. In the common size income statement, revenues are expressed as 100% and every item in the income statement is expressed as a percentage of revenues. In the vertical analysis, changes in the percentages of the different financial categories are compared over time. In particular, you will analyze and compare the financial position of your bank in the pre-crisis and post-crisis periods drawing on your interpretation of relevant financial ratios.

For example, from the vertical analysis of a balance sheet, an analyst can compare changes in the percentages of asset items and how they have been financed (changes in percentages of Liabilities). Strategies may include increase/decrease the holding of certain assets. The analyst may as well observe the trend of the increase in the assets and liabilities over several years.

Prepare your vertical analysis of your bank or financial institution using charts. Discuss the trends – in items on the statements that your vertical analysis reveals and whether they are favorable. Try to include overall industry comparisons over the same period.
B. Analysis of Key Bank Financial Ratios

(1) Calculate all of the indicated financial ratios for each year in the two four-year periods, the pre- crisis (2003-2006) and post-crisis ( 2010-2013) periods.
(2) Locate the “industry averages” for each of these ratios for the same years.
(3) Discuss your bank’s performance trend for each ratio for each sub-period and the industry’s average for each ratio. Write a description on how your company is doing (its trend) and how the industry is doing for each ratio. Compare, and analyze the trend in your company’s performance with the industry; is the trend improving, steady or declining. A chart with this information should be included for each ratio.
(4) For each ratio, in this section, include a graph (such as an excel graph) showing this ratio for each year and the industry benchmark

Ratios Pre-Crisis
(2003-2006) Pre-Crisis
(2003-2006)
2003 2004 2005 2006 2006
IND 2010 2011 2012 2013 2013
IND
Liquidity Ratios
Reserves to Assets
Ratio
Secondary Reserves (U.S Govt. Securities) to Assets Ratio
Leverage Ratios
Capital Ratio
(Equity Capital to Assets)
Profitability Ratios
Return on Total Assets
(ROA)
Return on Equity
(ROE)
Net Interest Margin
(NIM)

What do the two liquidity ratios tell you about the bank in each of the two sub-periods? Discuss the meaning and relevance of these ratios (e.g., is the bank getting better, worse, unchanged, erratic, from year to year? Is the company doing better or worse than the industry? What are your conclusions as to why? Is the trend good or bad in the two sub-periods?). For each ratio, include an Excel graph showing each ratio for each year and the industry benchmark.

What does the leverage (capital) ratio tell you about the bank in the two sub-periods? Discuss the meaning and relevance of this ratio (e.g., is the bank getting better, worse, or unchanged in the post-crisis period? Is the bank doing better or worse than the industry? What are your conclusions as to why? Is the trend good or bad?). Include an Excel graph showing this ratio for each year and the industry benchmark.

Is the bank adequately capitalized or undercapitalized. Discuss any trends, good or bad.

What do the three profitability ratios tell you about the bank in the two sub-periods? Discuss the meaning and relevance of these ratios (e.g., is the bank getting better, worse, or unchanged in the post-crisis period? Are changes in the capital ratio affecting the profitably ratios? Explain for each profitability ratio. ls the bank doing better or worse than the industry? What are your conclusions as to why? Is the trend good or bad. For each ratio, include an Excel graph showing each ratio for each year and the industry benchmark.

From the results of the financial analysis, discuss any findings that should enhance your bank’s ability to pursue business opportunities and any findings that may hinder your bank’s ability to pursue business opportunities. Be sure to identify the financial ratios and/or components of the vertical analysis that support your findings.

Assessing Bank Risk – Some Additional Ratios Relevant to Banks*
While many of the above financial ratios are relevant to all firms and some are very relevant to banks, you will still want to augment the above analysis with as many of the following financial ratios that are particularly useful in assessing bank risk. If possible, get these over a number of years, particularly the most recent years. You will want to create another table for these ratios:

1. Tier 1 Capital Ratio and any other risk-based capital ratios you obtain/calculate;
2. Nonperforming Asset Ratio (NPA ratio);
3. Tangible Common Equity Ratio (TCE ratio)
4. Loan Loss Reserve Ratio

* See the attached document, entitled “Appendix: Assessing Bank Risk – Some Additional Ratios,” for more information on these additional ratios (how they are calculated, etc.).
You will also want to interpret each of these ratios and their trends. What do the risk-based capital ratios tell you about the bank’s capital adequacy? Interpret the NPA, TCE, and loan-loss reserve ratios and their trends.

Your assessment of bank risk should also include any findings from your research on the results of stress tests on how your bank would perform under dire scenarios. (Go to the Federal Reserve website and select “Banking Information & Regulation” for information on “Stress Tests and Capital Planning.” Also see chapter 10 in Mishkin (2016).)

Analysis of Bank Strategy

This part of the project focuses on your bank’s past and future business strategies. Did the bank expand its operations beyond its historical core lending activities? Did its risk management techniques change? Is it managing its credit risk and interest rate risk better in the post-crisis period. Explain. What major challenge(s) does it face today?

Suggest a future bank strategy based on your analysis in the previous sections
Briefly discuss the advantages and disadvantages of this recommended strategy. This discussion should identify the advantages of the recommended strategy and the disadvantages of the recommended strategy as they apply to your bank specifically.
Conclusion

Briefly summarize your findings on from the industry analysis and the financial analysis of your bank. Briefly highlight any key challenge(s) that your bank faces in the aftermath of the financial crisis, as well any opportunities. Then identify and briefly discuss any key strategic issue(s) facing your bank based upon your findings in in this report. Finally, identify any recommended strategy or strategies going forward.

References

Appendix: On-line Resources
1. The Federal Reserve Board of Governors (www.federalreserve.gov)
2. The Securities & Exchange Commission (www.sec.gov)
3. The Conference Board (http://www.conference-board.org/economics)
4. The Money Page (www.moneypage.com)
5. American Monetary Institute (http://www.monetary.org/lostscienceofmoney.html)
6. Daily Forex.com (http://dailyforex.com/aboutus.aspx)
7. Museum of American Financial History (www.financialhistory.org)
8. FDIC (www.fdic.gov)
9. FINweb (www.finweb.com)
10. Trading Day (www.tradingday.com)
11. Global Insight (www.globalinsight.com)
12. Euromoney (www.euromoney.com)
13. Bloomberg (www.bloomberg.com)
14. Marketwatch (www.marketwatch.com)

Note: The Marketwatch website is a good source for obtaining recent financials for your bank. But you will want to explore most of the links above as if they have useful information
Also, you will want to visit the RMC library resource database:
www.robertmorris.edu/library/databases/
For example, through the RMC library database, you can access the Business and Company Resource Center and Standard and Poor’s Industry Surveys, among other databases.

Finance 620

Databases:
These resources can be accessed through the library internet site at http://www.robertmorris.edu/library/databases/. All Databases listed may be accessed off campus at any time.

Business & Company Resource Center- Profile, History, Industry Information, SIC and NAICS #, Financial Information.

Standard & Poor’s Industry Surveys and Stock Reports- Industry Information and Company Information.

ValueLine- Company Information and Finances.

Key Business Ratios (Dun and Bradsheet) – provides access to last three years of industry norms and business ratios published in Dun and Bradsheet.

Mergent Archives – Archived Dun and Bradsheet industry norms & business ratios.

Lexis Nexis-Disclosure Reports and SEC filings. Plus, Hoovers!!!!

Proquest- Articles from the Wall Street Journal and other business publications.
Books:

The Class TEXTBOOK.

Industry Norms and Key Business Ratios- see the librarian for this book.

Almanac of Business and Industrial Financials Ratios- see the librarian for this book.

Internet Resources:

Beige Book Archive (Federal Reserve Bank of Minneapolis)- Important Source!!!!
http://www.minneapolisfed.org/bb/

U.S. Department of Treasury- http://www.ustreas.gov/

U.S. Securities and Exchange Commission- All company filings. http://www.sec.gov/

Google Finance –http://finance.google.com/

Marketwatch- http://www.marketwatch.com

Your Company’s Home page!!!!!!!!!!! Look under investor relations or about us to find corporate information and filings.
Class, I googled each of your bank annual reports. The website links listed below have links to annual reports for 2015 and earlier years annually (back to 2003 and often even earlier). Important: you may have to search the bank’s archives for the earlier years or search the database at the website.

Bank of America
http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-reportsannual

Chase
http://investor.shareholder.com/jpmorganchase/annual.cfm

Citigroup?
http://www.citigroup.com/citi/corporategovernance/ar.htm

Wells Fargo
https://www.wellsfargo.com/invest_relations/annual

PNC Bank
http://phx.corporate-ir.net/phoenix.zhtml?c=107246&p=irol-reportsannual

First Midwest Bank
http://www.firstmidwest.com/annualreports/

Northern Trust?
https://www.northerntrust.com/about-us/investor-relations/annual-report

See the next page for additional links that may prove helpful in your bank financial statement and bank ratio analysis.

Here are a few more links that should be helpful in your bank financial statement and bank ratio analysis:

1. Bank Lending and Reserves:
http://wfhummel.cnchost.com/banklending.html
2. Bank Capital Requirements:
http://wfhummel.cnchost.com/capitalrequirements.html

Also see pp. 254-257 in CH 11 of the Mishkin text for a helpful discussion of capital requirements and risk-based capital requirement.

3. Bank Financial Statement Analysis and Risk Analysis:
http://www.credfinrisk.com/bank.html#capadequacy

4. Capital Adequacy Ratio:
http://en.wikipedia.org/wiki/Capital_adequacy_ratio

This brief article on Seeking Alpha is interesting and contains an intuitive discussion of
Tier 1 Capital Ratios of Large U.S. Banks in early 2009:
http://seekingalpha.com/article/144403-tier-1-capital-ratios-of-large-u-s-banks?

These links and this information represent the joint efforts of Dr John Santos and Dr Lateef Syed.

Appendix: Assessing Bank Risk – Some Additional Ratios

Here are some ratios or numbers (from which ratios can be calculated) that all publicly held banks must disclose in their annual financial reports.

1. Tier 1 capital ratio
Tier 1 ratio is a risk-based capital ratio. Tier 1 capital is core equity capital (instruments that can not be redeemed solely at the option of the holder).

Tier 1 capital ratio = Tier 1 capital / TRAA

where TRAA = total risk-adjusted assets

*Note: The tier 1 ratio is the most widely-cited risk-based capital ratio, but you can also calculate a tier 2 capital ratio as well as the total risk-based Capital Ratio

Tier 2 capital = Loan Loss Reserves + Subordinated Debt

Tier 2 capital ratio = Tier 2 capital / TRAA

Total Risk-Based capital ratio = (Tier 1 capital + Tier 2 capital)/TRAA
= Tier 1 capital ratio + Tier 2 capital ratio

2. Nonperforming Asset Ratio (NPA ratio)

NPA = Loans 90 or more days late / Total Assets

3. Tangible Common Equity ratio (TCE ratio)
The TCE ratio is not often reported by banks in their financial statements. But it can be calculated from the bank’s balance sheet using the following formulas.

Tangible Common Equity ratio = Tangible common equity/Tangible Assets

Tangible common equity = (total shareholder equity – Preferred Stock
– Goodwill and Intangibles)

Tangible Assets = Total assets – (Goodwill and Intangibles)

4. Loan Loss Reserve Ratio
Loan Loss Reserve Ratio = Loan Loss Reserves/Total Loans
Background Reading
Be sure to read these text chapters in doing your project: CH 10 (“Banking and the Management of Financial Institutions”) in Mishkin (M) together with web appendix1 to CH 10, and CH8 (“Financial Crises and the Subprime Meltdown.”) in M.

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