Case 75: Federal Bank Solution

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Case: 75 Federal Finance Bank – Instructor’s Solution

INPUT DATA: Amount Needed to Raise Flotation Costs Stock Offer Price Market Value/Book Value Ratio (Dollars in thousands) Assets Cash U.S. Treasuries Mortgage-backed Securities Municipal Bonds Government Agency Securities Total Cash & Securities Residential Mortgage Loans Consumer Loans Business Loans Total Loans Fixed Assets Total Assets Liabilities Passbook Savings Non-interest Checking N.O.W. Accounts Money Market Accounts Certificate of Deposits Total Savings Borrowed Money Other Liabilities Total Liabilities Capital Stock ($100 par value) Retained Earnings Total Equity Total Claims Loan Loss Reserve Allowable Risk Adjustment Weights: No default risk Low default risk Res. loans & muni. bonds Other assets

OUTPUT DATA: $8,000,000 13.28% $20.00 1.15 Return on Assets 1.50% Original Share Price $250.63 # shares to raise capital (@$20) 461,255 Net per share $17.34 Capital Asset Ratio 5.04% Risk Based Capital Asset Ratio 10.64% Annual Growth in Assets 13.96%

7,387 12,477 110,684 25,970 34,740 $191,258 $189,164 36,583 77,693 $303,440 $ 31,128 $525,826

$

$ 58,693 10,654 36,581 115,268 185,561 $406,757 $ 68,701 23,878 $499,336 $ 12,155 14,335 $ 26,490 $525,826 $ 2,680

0% 20% 50% 100%
(Table continued)

Case: 75 Federal Finance Bank – Instructor’s Solution

YEAR 2000 1999 1998 1997 1996 1995

NET PROFIT (THOUSANDS) $7,863 $6,732 $5,959 $5,450 $4,745 $4,077

ASSETS (THOUSANDS) $525,826 $461,119 $402,667 $360,954 $312,172 $273,617

Data on Publicly Traded Banks:
ASSETS (1,000) EQUITY (1,000) BOOK VALUE PER SHARE PRICE NET PROFIT ASSETS 1995 (1,000) (1,000)

Maryland Financial Great Northern Bank First Bank of California Omaha Federal

$220,000 476,000 305,000 238,000

$11,800 23,700 15,400 12,900

$31.35 21.08 40.56 25.75

$34.68 20.84 36.54 30.36

$3,322 6,172 2,745 3,546

$109,400 241,600 239,000 123,609

OWNER Brown Zudlum Jones Others

PERCENT OWNED 33% 31 20 16

Model Use For consistency, we developed a spreadsheet model for the case. However, in class we emphasize financial calculator solutions for learning the basics of the model and use the spreadsheet application for sensitivity analysis to determine how changes in the variables affect the results. There is some danger that beginning students will not really understand the basic logic underlying the model if they are not required to do some calculations by hand. The student versions of the models have some of the formula cells erased; thus the students get an idea about the model’s structure while they complete it. The spreadsheet also allows sensitivity analysis to determine how changes in the variables affect the results.

QUESTIONS
1. Using information contained in Table 1, Federal Finance’s balance sheet at the end of 2000, calculate Federal Finance’s capital asset ratio, risk based capital ratio, number of shares of stock outstanding, and book value per share of common stock. Based on the ratios, explain the bank’s capital adequacy. Capital Asset Ratio = Book value of core capital/assets = common stockholders’ equity/total assets = $26,490 / $525,826 = 0.05038 = 5.04%.

Case: 75 Federal Finance Bank – Instructor’s Solution

The Current Capital Asset or Leverage ratio of 5.04 percent is just above the minimum requirements set by federal regulations for well-capitalized institutions (5.0 percent, see Table 2). Risk Based Capital Ratio = Total capital/risk adjusted value of assets Total capital = core capital + allowance for loan losses = ($26,490 + 2,680) = $29,170 Risk adjusted value of assets = 0% (cash + U.S. Treasuries) + 20% (mortgage-backed securities + general obligation municipal bonds + government agency securities) + 50% (residential mortgage loans) + 100% (consumer loans + business loans + fixed assets) Risk adjusted value of assets = 0($7,387+12,477) + .2($110,684+25,970+34,740) + .5($189,164) + 1.00($36,583 + 77,693 + 31,128) = .2($171,394) + .5...
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