Financial Institutions 1. How profitable has Merc

The five year period reported in exhibit 7-1 and 7-2 have seen a reasonable growth in Merchants National Bank(s (herein noted as MNB) prospects. The ratio of total income to total expenses shows a favorable upswing in the most recent year. The 8 percent five years ago, 9 percent last year, and 12 percent in the most recent year shows a considerable growth in the most recent year and compares better than average with the 7 percent, 9 percent, and 8 percent in the same periods in exhibit 7-4 for other comparable banks in MNB(s home state. But the increased profits appear to largely be due to short-term phenomena that may not affect the long-term decline in banking represented as the trend in earnings in exhibit 7-4. Declining interest rates in the five year period allowed banks to profit from the sale of investment securities. Interest margins also increased during the same period. If interest rates rise from their current levels, banking may return to very healthy profit levels. Theoretically, bank loans are the most efficient method of supplying capital in the presence of information or monitoring problems. Historically, corporations have been prone to these sorts of problems.

2. How does the bank(s profitability compare with other banks of comparable size in the state? Is there room for improvement?

The two common factors representing a banks overal

. . .
ent interests with outsiders; managers essentially become the sole owners. By examining financial firms, it is important to pay attention to the concentration of both insider and outsider holdings. MNB should find that concentration initially rises, and then falls as interests between the inside managers and outside shareholders become aligned. It seems that an estimate can be determined between the linear relationship between insider ownership and portfolio choice for a sample of bank holdings. It appears that stockholder controlled banks took on more risk than managerially controlled banks. The varying specifications of the relationship between insider stockholding and firm performance motivates the model and the empirical tests developed. As far as management goes, the proposition is a model of corporate control in banking that has the crucial feature of investment opportunities: there seem to be relatively fewer good lending opportunities. This might allow managers of MNB to be precise about the source of value reduction, namely, the risk and return choices made by MNB facing deteriorating investment opportunities. The decline in investment opportunities means that for banks there are fewer positive net present value (NPV) lo
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