Quantitative and qualitative analysis

With the changes in economic, there are several Asset-based lending fit First National’s corporate image and tradition and their leading philosophy in the market have been taken into consideration. There are several factors which might negatively impact the business growth of the organization. This report is divided into two specific parts. First part is accompanied with the quantitative details and second part is based on the qualitative information given on the corporate financial analysis of the company. In the first part, Asset-based lending fit First National’s corporate image and tradition and lending philosophy has been discussed and taken into consideration. After that asset-based lending improve the bank’s return on net worth (RONW) and return on assets (ROA) has been assessed. Afterward, first national venture in asset-based lending parallel banks’ lending practices prior to the recent global financial crisis has been evaluated and justification regarding its implication has been given. After that, in the second part, Credit Risk of First National and assessment of the financial details of the bank has been given which reflects the key aspects and financial performance of company. The horizontal and financial vertical analysis have been used to assess the financial performance of company which helps in evaluating and assessing the financial performance of company.

Does Asset-based lending fit First National’s corporate image and tradition? Its lending philosophy? Explain.

There are certain things about bank that the chief characteristic of traditional commercial banking system is transaction of unsecured loans. Businesses seeking for finance to expand, or to support working capital expenses often prefer traditional unsecured loans as they are less costly compared to non-traditional asset based secured loans. But traditional lending has certain limitations that face companies which grow rapidly or which is new in the business without any track record or do not possess high credit rating. Skepticism about loan repayment capacity of such businesses on the part of lending institutions, especially banks, has turned small as well as big businesses to move to asset-based lending (ABL). In the aftermath of recent financial crises, the lenders have become more tight-fisted in their lending policy. Often companies with existing line of credit need capital for further growth, but the lending banks do not extend the credit limit, or sanction new loan application of such companies. In such cases the companies have to go for ABL to finance their growth plan.

First National Corporation, founded in 1800, continued with traditional banking system till 1985. In 1986 Robert Huenephy, then vice president of the corporation’s special lending division came out with the proposal of introducing ABL. The proposal met with skepticism from senior level management and enthusiasm from loan officers, the former was more concerned with non-repayment losses in spite of finance needs of customers and competition in the market while the later found it means to meet their loan goals.

Asset-based lending and First National Corporation

The uneasiness of the senior personnel of the bank was rooted in the traditional banking character and the history of the bank. The bank was established in the conservative city of Ohio and was the largest subsidiary of the BHC. The bank was chartered under National Banking Act 1863. The bank pursued traditional lending policy and succeeded in mergers and acquisitions to become the fifth oldest bank of the country. The bank’s philosophy in money lending business can be appreciated from the fact that during the Great Depression of 1933, although the clearing house limited withdrawal from bank account to 5%, First National was the only bank to honor withdrawal of full deposit. The bank traditionally conducted business with small and large corporations, and never entered in personal loan providing business. The bank had an impeccable fiscal prudency, solid capitalization, and satisfied customer base, and community involvement. These helped the bank to spread in the business finance market. Though the bank started business in retail banking, it never moved away from its traditional banking practices (Mayo, 2015).

Globally the financial service sector is passing through a dramatic transformation from relationship or traditional banking to ABL, due to consolidation-created large complex organizations that are often run from a distance geographically and culturally long from the marketplace and their product delivery system has been moved from human platform to technological platform, with minimum community involvement. The concern of the senior management of First National is that ABL would impair the bank’s ability to provide services to small businesses with opaque information about banking industry. The first National’s lending business depended upon accumulated soft data about the business, the character of the owner, the owner’s loan repayment history, etc (Wei, Wu, and Zhang, 2019). The community involvement of the bank that grew over time would be eroded with introduction of ABL.

Huenephy argues that in the scenario of current ABL lending by commercial banks, First National should start shifting away from traditional banking system to capture the middle market companies. The senior management of First National is concerned that due to huge competition in the ABL market, the banks are reducing interest rate resulting in lower profit margins. The management is also concerned about monitoring loans in huge amount which is comparatively easier in traditional lending (Logan, 2016).

Huenephy’s view is quite in line with the profit earning motive of commercial banks which other banks are pursuing, and its necessity cannot be overemphasized. But for more than a century First National has been pursuing a policy of traditional lending and has made a position of pride in the sector, and the vice president’s view is a blow to the traditional lending business of the firm. Though time and economic variables are in favor of ABL, in spite of the failures of some banks in the ABL sector, the shifting of its business from traditional lending to ABLdoes not fit with the corporate culture First National developed in its traditional banking practices (Acharya, and Ryan, 2016).

Assessment of First National Corporation’s credit risk

Does Asset-based lending improve the bank’s return on net worth (RONW) and return on assets (ROA)

ABL or lending against collateral securities has a long history that goes back as long as to 17^th century, when British moneylenders used to mortgage land as collateral security in granting farm loans. This old idea has been re-established in solid footing as the notion that assets of firms including receivables, inventories, machines, plants, lease revenues, etc have substantial lives irrespective of the enterprise’s future has, been accepted as the corner-stone of the ABL philosophy (Statista., 2019).The idea of ABL, notwithstanding its profit enhancing ability, can be seen to have critically contributed to the beneficial effects of securitization of assets and structured finance (Lane, 2018).

After that, in 19^th century it was discovered that ABL came to be an attractive business strategy and the loans in the balance sheets of the banks doing ABL business were actually performing better than the non-asset-based lending banks. The loans even provided higher returns than the loans of the traditional lending bank (First National’s deposit composition. 2019). From this time onward, many commercial banks entered ABL business either through acquisition or through expansion. Initially ABL was not included in the proper banking business, but established as subsidiaries, but it opened up and competition grew as profit margin, return on net worth (RONW), and return on assets (ROA) were commendable (Fixler, andZieschang, 2019).

The basic difference between traditional lending and ABL is that in traditional lending loans are provided by the banks to the borrower on the basis of borrower business’s financial ratios, whereas in ABL loan is provided against security of an asset of the borrower. Such assets are generally receivables, equipment, and inventory, which can be converted into cash by the lending banks. Before sanctioning the loans, asset-based lenders make a thorough study of the assets that the borrower presents as security. It is seen that values of such securities are not correlated to market swings. Thus, there is minimum risk in holding these assets as collateral security (Logan, 2016).

The economic forces of finance market have initiated innovations as well as competition in the sector. Competition among finance companies and banks in chasing loans has eroded the cost advantages that traditional banks once enjoyed in terms of acquiring deposits (National’s deposit composition. 2019). This has affected profitability of traditional banks and many banks have taken to more innovative lending practices to avoid loss in profit earning capacity (Asset-based lending improve the bank’s return on net worth (RONW) and return on assets (ROA 2019).  During the 1960s the cost advantage of the traditional banks disappeared as inflation broke in, interest rate increased, and investors became conscious about yield differentials of different assets. This resulted in withdrawal of deposits by investors from zero or low interest paying banks, and garaging them in high interest paying financial institutions (Drechsler,  Savov, andSchnabl, 2018).

Evaluation of First National Corporation’s financial performance

The growth of commercial paper market, bond market, and financial institutions’ securitization of assets have eroded the commercial banks’ advantage of providing credit that was the hallmark of traditional banking. First National and banks alike have also been subjected to formidable competition from Japanese banks that entered US finance market with their cheap deposit due to high rate of savings in Japan. This fund was not available to US bankers. Many foreign banks entered the US market to and enjoyed competitive advantage due to less rigid finance business statutes in their home countries (Kidwell, et al. 2016).

Multiple factors have contributed to decline of advantage of commercial banks in raiding deposits and resultant decline in their profitability. Analysis of performance of commercial banks from 1960 to 1993, in figure 1 shows commercial banks’ return on assets (ROA) and return on net worth (RONW) both have declined. The profit before tax (PBT) of commercial banks fell from 15% average in 1970-84 to 12% average in 1985-91 period (Acquirers, et all. 2016).

Figure 1:

Source:- Credit risk 2019.

DoesFirst National’s deposit composition make it necessary to find higher-yielding earning assets than are current booked? Explain.

The decline in the competitive advantage and resultant decrease in returns of First National is attributable to a great extent to its low-yielding assets in the balance sheet. As the depositors have gone through a disintermediation process of withdrawing from low interest paying banks to high-interest paying financial institutions (Guttmann, 2017). First National must revisit its asset composition (Government regulation, 2019).  In order to move from low to high yielding assets, First National can move to riskier assets like real estate and financial derivatives through off balance sheet activities. Many US banks have been employing greater percentage of their funds in real estate loans, though they are riskier. Figure 2 shows the increased percentage of lending by commercial banks in real estate loans (Guttmann, 2017).

Figure 2

Alternatively, First National can move to financial derivatives. Many commercial banks indulged in off balance sheet derivative activities which increased their share of income from off balance sheet non-interest activities to more than double. In 1992 US banks held total derivatives to the tune of $8trillion(Tpporowski, 2017).

Does First National venture in asset-based lending parallel banks’ lending practices prior to the recent global financial crisis? Justify your position.

Global financial crisis (GFC) is defined as a state of time that had extreme stress in banking systems as well as in world financial market in between 2007 and 2009. In this period of time duration, there was a financial crisis that started from United States to other parts of the world which consisted of downturn in housing market and in banking infrastructure. Many financial institutions went through heavy losses due to this global financial crisis. These banks heavily relied on government aids. Many people also lost their jobs due to this along with other financial crisis, experts also suggested that this global financial crisis is same as in great depress happened in 1930. People involved in this global financial crisis were working class people in this system which consisted of average middle class people to lower class people. The causes of global financial crisis involves excessive amount of risk taken in favorable amount of macroeconomic environment. Which states that prior to this economic crisis conditions were stable in the country, economy were strong and growing, employment was rising and inflation was low. In order to take advantage to this situations financial institutions and lending companies took a large amount of money from the market. This increment of borrowing was increasing from investors and other banks. Other reasons like policy as well as regulation error from government’s part were also taken into consideration for this downfall.

Some similarities which involved are prices of assets rose in many different countries before this financial downfall. Secondly, some of credit booms were experienced in some cases of key economics. Thirdly, increasing of marginal loans in case of mortgage and which consisted of several economics which resulted in sharp financial risk and lastly failure of regulations and law applied by the government. On the other hand some differences involved were use of opaque as well as complex instruments of financial aspects. Secondly, inter connection between different financial markets and other banks. Thirdly, this financial institution increased the degree of leverage very sharply and lastly introduction of household sector which sums all the differences. Banks collect different kinds of collateral such as real estate; cash secured loans, inventory financing, invoice collateral, blanket liens. Other borrowings which banks collect without any collateral are unsecured loans, online loans, and co-maker or co- signer approvals.

Global financial crisis ended with few policy responses from the government such as lowering down the interest rates at very low levels and provided financial support to financial sectors and banks which secured the confidence of the investors. Secondly, increasing government spending also helped in reducing global financial crisis. This helped the employment to rise up and create more financial stability among the powering class of the society. Many companies returned to stable conditions and economy was stabilized. The government also applied strong grip on laws and regulations in which banks critically analyze investors and assets connected to risks. Many appropriate actions are taken to assess risks and stop this risk taken by the banks.
The impacts to this Global financial crisis were major declination to value of stocks as well as in housing. There was also reduction in investment in major businesses in Unites states during this Global financial crisis. Unemployment rate was also increased due to this crisis bulk of this impact was impacted upon working class people in this system which consisted of average middle class people to lower class people. The unemployment rate rose sharply in this stage caused serious damage to United States economy. Peoples also lost their houses due to nonpayment of mortgages. There increasing poverty all across the country. Lots of people were reduced to poverty line, decreased health conditions appeared among the working class citizens. Other impacts also stated increased crime rate in the cities followed by robbery, bank frauds were also increased. While on the other hand exports decreased, work productivity was decreased due to fewer employees. Food shortages were also seen which developed in to decreasing hunger index of the country on the other hand foods which are found in the market spiked in price.  

ABL opened its book in 1990s, when superior performing companies with respectable earnings, cash flow, and enterprise value could access cash flow-based lending by commercial banks, but others with significant balance sheet bottom line started accessing the ABL market. During the initial years of ABL loans were provided by lenders for a portion of the accounts receivables, inventory, and certain equipment’s (Traditional lending, 2019).Hence companies with traditionally high volume of inventory and accounts receivables could easily meet the criterion for accessing asset-based loans, irrespective their cash flow positions. Retailers, manufacturers, and retailers were mostly borrower of asset-based loans due to their huge volume of such current assets (CHANDREN, AHMAD, and ALI, 2017).

During the dot.com boom beginning in late 1990s, loans flew freely and million dollars were provided as venture capital to start-ups. The demand for venture capital exceeded to such an extent that disturbed the ABL market and hedge fund stepped in to provide the second-lien term loan portion of the total loan package, as the erstwhile asset-based lenders could not meet the total loan requirement.  Thus, the system emerged in which traditional asset-based lenders provided the first-lien and the hedge fund institutions provided the second-lien portion of term loans (Charitou, Elfani, and Lois, 2016).

Consider First National Corporation has the same financial statements headed 2019, 2018, and 2017, instead of 1985, 1984, and 1983. Many changes have taken place in products and technology. Edward Altman published his concern about a credit bubble prior to the Global Financial Crisis. Is he right again? What credit risks face First National and what alternative steps can be taken to mitigate these risks?

Credit risk of financial services companies are primarily made of risks from asset-based lending. The recent GFC in the US finance sector was direct fall-out of asset bubbles in the balance sheets of financial institutions. Unlike traditional lending where business performance, especially cash flow, is the chief criterion for eligibility, in ABL, quality of the underlying security is the primary requirement, notwithstanding the borrower’s performance. Asset based loans are secured by tangible assets, namely accounts receivable, equipment, and inventory. Such loans are used to finance borrower’s working capital. The basic principle behind ABL is to monetize these assets, in the balance sheet of the borrowers, and enable the borrower to reduce their cash conversion cycle (CCC)(Council, et al., 2017). Majority of the applicants of ABL comprises of small and medium enterprises (SMEs) which have low cash flow but huge current assets, and start-up enterprises with no previous cash flow record to acquire traditional banking loan. In ABL the lenders focus on the quality of collateral that is liquidity of the assets of the borrower and the time needed to convert them into cash. There is a direct relationship between quality of the assets secured and advances made by the lender, as low-quality collateral poses risk of low or non-payment due to lack of liquidity (Kilroy, and Schneider, 2017).

The amount of collateral against loan in the balance sheet of First National was $1,214,379, $1,396,706, and 1,944,590 in 1983, 1984, and 1986 respectively. Thus collateral securities of First National increased by 15% in 1984 and by 39% in 1985, relative to the previous year. Thus there has been a sky-rocketing increase during the span of time under consideration.

Along with the collateral securities in the balance sheet of First National, the company’s income from non-interest sources has steadily increased. Non-interest income of First National was $31,116, $35,128, and $40,066 in 1983, 1984, and 1985 respectively. That is to say that non-interest revenue in terms of fees for advancing cash against collateral increased by 12% in 1984, and by 14% in 1985, relative to respective previous year. Hence First National has been able to increase revenue by asset-based lending (Council, et al. 2017).

First National
Horizontal Analysis of Financial Statements
Income Statement	Change	1985	Change	1984	1983
	%	$	%	$	$
Interest Income
Interest and fees on loans	15.385089	187405	26.6359986	162417	128255
Interest on federal funds sold	-34.73310864	33307	10.59772008	51032	46142
Interest on investment securities
Taxable	10.3844499	43614	5.46954247	39511	37462
Non-taxable	-2.423822715	7045	-6.88676812	7220	7754
Other interest income	-39.10939013	629	-64.3424232	1033	2897
Total interest income	4.129580074	272000	17.393825	261213	222510
Noninterest Income
Trust income	13.9965096	13064	16.28614916	11460	9855
Service charges and fees	25.77238513	22390	10.07234279	17802	16173
Other operating income	-21.37742925	4612	15.2908805	5866	5088
Total noninterest income	14.05716238	40066	12.89368813	35128	31116
Interest Expenses
Interest on savings deposits	19.02712816	19086	22.2179878	16035	13120
Interest on time deposits	12.98618576	113524	22.21424835	100476	82213
Interest on short term borrowings	-42.99881	28740	15.55738907	50420	43632
Interest on long term debt	10.113478	5531	3.652496905	5023	4846
Total interest expenses	-2.950207614	166881	19.56943488	171954	143811
Provision for possible loan losses	38.8201131	9083	10.61707523	6543	5915
Noninterest Expenses
Salaries	16.54128496	38419	8.928099392	32966	30264
Pension and employe benefits	11.10737691	6612	15.73317775	5951	5142
Equipment expenses	18.78676471	9693	7.326055504	8160	7603
Occupancy expenses	23.49750488	5692	1.296703297	4609	4550
State tax	5.53125804	4102	4.517343372	3887	3719
Other operating expenses	21.36493796	30516	17.60523854	25144	21380
Total noninterest expenses	17.73727963	95034	11.09168983	80717	72658
Net operating income before tax	10.61491637	41068	18.83682223	37127	31242
Taxes	30.56108237	9843	31.98529412	7539	5712
Income before security gains or losses	5.194673516	31125	15.89502546	29588	25530
Other income (primarily security gains and losses)	2777.227723	2906	-0.980392157	101	102
Net  income	14.96177035	34131	15.82787141	29689	25632
Per share
Net income	10.33333333	3.31	15.83011583	3	2.59
Dividends	10.23622047	1.4	7.627118644	1.27	1.18

Balance Sheet	Change	1985	Change	1984	1983
	%	$	%	$	$
Assets
Cash and due from banks	13.08854191	244079	2.92322	215830	209700
Investment securities
US Treasury and agencies	30.73776497	437225	-11.54895	334429	378095
States and political subdivisions	-1.277299424	121191	-8.47623	122759	134128
Other securities	4.253138611	4069	-0.10238	3903	3907
Total investment securities	21.99001932	562485	-10.66379	461091	516130
Federal funds sold and reverse repos	-17.02350061	452475	4.55870	545305	521530
Loans
Commercial and agricultural	63.79986645	740798	-7.50614	452258	488960
Real estate-construction	74.03319123	68583	41.12591	39408	27924
Real estate- mortgage	37.36102597	622935	39.34400	453502	325455
Instalment and credit cards	37.36102597	622935	39.34400	453502	325455
Other	17.82090045	214328	21.46525	181910	149763
Total loans	38.83706877	2014916	14.49091	1451281	1267595
Less unearned interest	24.20654845	-47001	-4.86474	-37841	-39776
Less allowable for possible loan losses	39.38687702	-23325	24.50893	-16734	-13440
Ner loans	39.22686664	1944590	15.01401	1396706	1214379
Premises and equipment	12.56074502	63697	-1.69547	56589	57565
Acceptances, customers’ liabilities	33.97016061	49297	-14.64591	36797	43111
Other assets	50.7557548	102232	-3.56787	67813	70322
Total assets	22.97460084	3418855	5.59811	2780131	2632747
Liabilities and Net Worth
Deposits
Noninterest bearing deposits	24.27188648	692392	-24.78305	557159	740736
Interest bearing deposits
Savings	37.5574304	804788	5.38568	585056	555157
Time	33.8640656	1085157	22.98259	810641	659151
Total deposits	32.23386671	2582337	11.27106	1952856	1755044
Short term borrowings	-14.87678217	405693	-10.71372	476595	533783
Long term debt	21.34570252	54807	-13.54466	45166	52242
Acceptances executed	33.97016061	49297	-14.64591	36797	43111
Other liabilities	39.35198699	66836	6.76253	47962	44924
Total liabilities	23.42735104	3158970	5.36297	2559376	2429104
Preferred stock		0		0	0
Common stock	113.430303	52824	10.00000	24750	22500
Surplus	-18.42551595	54349	28.12500	66625	52000
Undivided profits	18.03369918	152712	0.18352	129380	129143
Total net worth	17.72598582	259886	8.40294	220755	203643
Total liabilities and net worth	22.97460084	3418855	5.59811	2780131	2632747
Market value of securities at year end	23.85276507	568208	-9.81792	458777	508723

Horizontal analysis: Income statement:

After assessing the available information on the company, it could be inferred that the interest and fees on loans has increased by 27% in 1984 and 15% in 1985 compared to corresponding previous years. Interest on federal fund sold increased by 11% in 1984 and decreased by 39% in 1985. Total noninterest income increased by 13% in 1984 and 14% in 1985 compared to corresponding previous years (Kilroy, and Schneider, 2017). This has happened due to increased volume of revenue from ABL.

Commercial and agricultural loans fell by 7.50% in 1984 and increased by 64% in 1985 compared to corresponding figures of previous year. Commercial and agricultural loans fell in 1984 due to overemphasis on asset-based lending, especially on real estate. Asset-based lending to real estate construction business increased by 41% in 1984 and 74% in 1985 relative to the figures in the previous year. This has happened due to the company’s shift to ABL. Real estate mortgage loan increased by 39% in 1984 and 37% in 1985 due to the firm’s increased focus on ABL (Lin, Chan and Kwan, 2017). However, the increased investment in the current assets of the company has resulted to the high increment in the liquidity assets which has blocked high amount of capital of company.

Income statement of Company

Particular	1985	1984	1983
Income statement	Dollars	% of operating income	Dollars	% of operating income	Dollars	% of operating income
Interest on fees and loans	187,405	60.05	162,417	54.81	128,255	50.57
Interest on federal funds sold	33,307	10.67	51,032	17.22	46,142	18.19
· Interest on invest securities
1. Taxable	43,614	13.98	39,511	13.33	37,462	14.77
2. Non taxable	7,045	2.26	7,220	2.44	7,754	3.06
3. Other interest income	629	0.20	1,033	0.35	2,897	1.14
Total interest income	Total 272,000		Total 261,213		Total 222,510
· Noninterest income
1. Trust income	13,604	4.19	11,460	3.87	9,855	3.89
2. Service charges and fees	22,390	7.17	17,802	6.01	16,173	6.38
3. Other operating income and fees	4,612	1.48	5,866	1.98	5,088	2.01
Total noninterest income	Total 40,066		Total 35128		31,116
· Interest expense
1. Interest on saving deposit	19,086	6.12	16,035	5.41	13,120	5.17
2. Interest on time deposit	113,524	36.38	100,476	33.91	82,213	32.42
3. Interest on short time borrowing	28,740	9.21	50,420	17.01	43,632	17.20
4. Interest on long term debt	5,531	1.77	5,023	1.70	4,846	1.91
Total interest expense	166,881		171,954		143,811
Provision for possible loan losses	9083	2..91	6,543	2.21	5,915	2.33
· Noninterest expense
1. Salaries	38,419	12.31	32,966	11.12	30,264	11.93
2. Pension and other benefits	6,612	2.12	5,591	2.01	5,142	2.03
3. Equipment expense	9,963	3.11	8,160	2.75	7,603	3.00
4.  Occupancy expense	5,692	1.82	4,609	1.56	4,550	1.79
5. State tax	4,102	1.31	3,887	1.31	3,719	1.47
6. Other operating expense	4,102	9.78	25,144	8.48	21.830	8.43
Total noninterest expense	95,304		80,717		72,658
Net operating income before tax	41,068	13.16	37,127	12.53	31,242	12.32
Taxes	9,843	3.15	7,539	2.54	5,712	2.25
Income before securities gain or losses	31,225	10.01	29,588	9.98	25,530	10.07
Other income (primarily security gain or losses)	2,906	0.93	101	0.03	102	0.04
Net income	34,131	10.94	29,689	10.02	25,632	10.11
· Pet share
1. Net income	3.31		3.00		2.59
2. Dividend	1.40		1.27		1.18

Where Total operating income is equal to total interest income + Total noninterest income

Balance sheet

Balance Sheet	Change	1985	Change	1984	1983
	%	$	%	$	$
Assets
Cash and due from banks	13.08854191	244079	2.92322	215830	209700
Investment securities
US Treasury and agencies	30.73776497	437225	-11.54895	334429	378095
States and politicl subdivisions	-1.277299424	121191	-8.47623	122759	134128
Other securities	4.253138611	4069	-0.10238	3903	3907
Total investment securities	21.99001932	562485	-10.66379	461091	516130
Federal funds sold and reverse repos	-17.02350061	452475	4.55870	545305	521530
Loans
Commercial and agricultural	63.79986645	740798	-7.50614	452258	488960
Real estate-construction	74.03319123	68583	41.12591	39408	27924
Real estate- mortgage	37.36102597	622935	39.34400	453502	325455
Instalment and credit cards	37.36102597	622935	39.34400	453502	325455
Other	17.82090045	214328	21.46525	181910	149763
Total loans	38.83706877	2014916	14.49091	1451281	1267595
Less unearned interest	24.20654845	-47001	-4.86474	-37841	-39776
Less allowable for possible loan losses	39.38687702	-23325	24.50893	-16734	-13440
Ner loans	39.22686664	1944590	15.01401	1396706	1214379
Premises and equipment	12.56074502	63697	-1.69547	56589	57565
Acceptances, customers’ liabilities	33.97016061	49297	-14.64591	36797	43111
Other assets	50.7557548	102232	-3.56787	67813	70322
Total assets	22.97460084	3418855	5.59811	2780131	2632747
Liabilities and Net Worth
Deposits
Noninterest bearing deposits	24.27188648	692392	-24.78305	557159	740736
Interest bearing deposits
Savings	37.5574304	804788	5.38568	585056	555157
Time	33.8640656	1085157	22.98259	810641	659151
Total deposits	32.23386671	2582337	11.27106	1952856	1755044
Short term borrowings	-14.87678217	405693	-10.71372	476595	533783
Long term debt	21.34570252	54807	-13.54466	45166	52242
Acceptances executed	33.97016061	49297	-14.64591	36797	43111
Other liabilities	39.35198699	66836	6.76253	47962	44924
Total liabilities	23.42735104	3158970	5.36297	2559376	2429104
Preferred stock		0		0	0
Common stock	113.430303	52824	10.00000	24750	22500
Surplus	-18.42551595	54349	28.12500	66625	52000
Undivided profits	18.03369918	152712	0.18352	129380	129143
Total net worth	17.72598582	259886	8.40294	220755	203643
Totalliabilities and net worth	22.97460084	3418855	5.59811	2780131	2632747
Market value of securities at year end	23.85276507	568208	-9.81792	458777	508723

Vertical analysis: Income statement:

Expressed as percentage of operating income, interest and fees on loan was 50.57% in 1983, 54.81% in 1984, and 60.05% in 1985. Service charges and fees as percentage of total operating income in 1983, 1984, and 1985 were 6.38%, 6.01%, and 7.17% in 1983, 1984, and 1985 respectively (Statista., 2019).

After assessing the information given in the balance sheet of company, it has been found that Net loans as expressed as percentage of total asset was 46.13%, 50.24%, and 50.88% in 1983, 1984, and 1985 respectively. Total deposits as percentage of total assets in 1983, 1984, and 1985 was 66.66.66%, 70.24%, and 75.53% respectively. This has shown that there has been increment in the coming years and it is having good growth rate throughout the year.

Conclusion

After assessing the given information in both parts, it has been observed that as the depositors have gone through a disintermediation process of withdrawing from low interest paying banks to high-interest paying financial institutions, First National must revisit its asset composition. In order to move from low to high yielding assets, First National can move to riskier assets like real estate and financial derivatives through off balance sheet activities. Nonetheless, the demand for venture capital exceeded to such an extent that disturbed the ABL market and hedge fund stepped in to provide the second-lien term loan portion of the total loan package, as the erstwhile asset-based lenders could not meet the total loan requirement. In context with the financial performance, Asset-based lending to real estate construction business increased by 41% in 1984 and 74% in 1985 relative to the figures in the previous year. This has happened due to the company’s shift to ABL.

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