I need help responding one question !!!!!!! must read attached power point and document to be able to answer .

(Source: Gruenberg, et al., 2017)

Table 2: showing data of Return on Assets

The return on assets of the industry increases and decreases while that of the bank only increases from2000 and decreases from 2001 to 2002. As from 2002 to the ROA of the industry remains constant (Gruenberg et al. 2017). Therefore, the industry produced more net income per dollar of the total assets as compared to the bank. Also, as of the year 2007-2009, the ROA of the industry was negative indicating that the assets of the industry generated a negative income leading to losses that made the industry borrow money to finance its expenses.

Fig. 3: Graph showing Equity Multiplier for the bank

(Source: Gruenberg, et al., 2017)

Table 3: showing data of the Equity Multiplier

A higher equity multiplier indicates that the bank uses more debt to finance its assets and hence as a higher solvency risk which may lead to higher returns. In 2014, the bank had a higher multiplier than that of the industry indicating the willingness of the company to take risks to ensure effective running of the business activities (Penman, 2007). Also, commerce bank has a tier 1 capital of $1713752. The industry does not use more debts to finance its assets. Therefore, it does not have a higher solvency risks as compared to the company.

Fig. 4: Graph showing the profit margin for the bank

(Source: Gruenberg, et al., 2017)

Table 4: Showing data on the Profit Margin

Commerce has a lower profit margin than that of the industry; this shows that it was not able to control its expenses over the years since it has maintained its margin throughout the year. In the year 2007 and 2009, the profit margin of the industry constantly declines due to the financial crisis encountered by the banks. These include losses that rose from write-offs and a decrease in the net income of the firms (Gruenberg et al. 2017).Therefore, the firm with a lower profit margin may lead to bankruptcy since the expenses will be more than the revenues. If the situation continues for the next years, then commerce Bancshares will be forced to use reserves to pay its debts to avoid facing financial distress.

Fig. 5: Graph showing the asset turnover

(Source: Gruenberg, et al., 2017)

Table 5: Showing data on the Asset Turnover

Asset turnover of the bank is higher than that of the industry. It is more likely that the bank can utilize its assets and earn an operating income from them as compared to the industry. The turnover of the bank decreases significantly due to the increase in its non-interest expenses without an increase in its profits throughout the years.

Financial Underpinnings

The final underpinnings of the company include the loan portfolios, service charges, and core deposits. Financial underpinnings help in a great performance of the business since they create a foundation for the firm and also contribute to the achievement of the firm’s objective. For instance, in the case of core deposits, the company does not depend on local markets to finance its operations. Therefore, it means that it will not have more debts since it only relies on the capital markets and manages its operations efficiently (Subramanyam & Wild, 2009). Similarly, the service charges contribute to increasing gains in the firm for trading its assets and liabilities. Or, example, when consumers borrow loans from the bank, they are charged for the services. Also, on borrowing loans, the interest rates set for each amount is added as again to the firm leading to an increase in the profit.

Loan portfolio contributes to the financial performance of the firm. It comprises of all the loans the bank holds. Also, it depends on the interest that is to be earned on loans given to the consumers. The Commerce Bancshares has a higher percentage of the unused loans which contributes to the positive performance of the firm. This is because it has the opportunity to lend money to consumers and expect an interest rate which gives high returns leading to an increase in the gains of the company. Therefore, loan portfolio contributes to the financial performance of Commerce Bancshares.

PART B: Business Strategy

Fig. 6: Net Interest Margin

(Source: Gruenberg, et al., 2017)

Commerce Bancshares has a lower net interest margin of 26% as compared to that of the industry which is 74% (Gruenberg et al. 2017) .Therefore, the earning assets of the firm remain stable through the years due to the stability of the total assets of the firm. A decline in the interest margin of commerce is caused by the high yield on the customer’s loans which leads to an increase in the earning assets of the company. Similarly, an increase in the interest margin of the firm is due to the low charges on the interest of the loans borrowed by the consumers and low costs of funding that were required in the firm.

Fig. 7: Chart showing loss allowances

(Source: Gruenberg, et al., 2017)

Allowances for loan losses are established in the company so that it can be in a position to control its operating income. The allowance of commerce are higher than those of the industry; this shows that the firm is expecting loan losses in the future and therefore have implemented a way to curb the crisis that may befall the company (Gruenberg et al. 2017). Also, it shows that the loan portfolio of the firm increased rapidly through the years. Similarly, the allowance of the industry is low due to healthy capital markets that have led to an increase in the total assets which is caused by the credit quality of the capital markets.

Fig. 8: Chart showing the distribution of loans

(Source: Gruenberg, et al., 2017)

Loans to core deposits increase rapidly in the industry and were extremely low in commerce. This shows that commerce Bancshares does not rely on the local markets to provide funds for them as in the case of most large banks (Gruenberg et al. 2017). The ratio decreases rapidly as the firm merged with one bank and therefore did not consider to depend on other markets to fund their activities. On the hand, the industry relies greatly on local markets to finance its assets leading to a rapid increase in the core deposits ratio.

Fig. 9: Chart showing the loans to asset ratio

(Source: Gruenberg, et al., 2017)

The loan to asset ratio shows the amount of money that is given to its consumers as loans. Commerce Bancshares maintains a lower ratio than that of the company (Gruenberg et al. 2017). But when Bank one merged with commerce, the ratio increased since the bank offered a lot of loans to the consumers.

Fig. 10: Non-interest income %

(Source: Gruenberg, et al., 2017)

Commerce maintains a higher noninterest income as a percentage of operating income; this indicates that its income comes from the charges on deposits and the profits it gains from trading its assets and liabilities (Gruenberg et al. 2017).This increase in the ratio can be as a result of a decrease in the total operating income which results from an increase in provision of loans and losses.

Fig. 11: Cost efficiency ratio

(Source: Gruenberg, et al., 2017)

Commerce Bancshares has a high-cost efficiency ratio indicating that it is inefficient and is not able to control its costs. But due to its merger with Bank One in the year 2014, there was an increase in its noninterest expenses which led to an increase in the cost efficiency ratio.

Fig. 12: Equity to Asset Ratio

(Source: Gruenberg, et al., 2017)

Commerce Bancshares has a lower equity to asset ratio. This is because it utilizes its Equity since it’s a large bank and can access the capital markets easier than other banks (Gruenberg et al. 2017). Therefore, the industry cannot access the capital markets easily since it’s composed of many smaller banks.

Operating income = non-interest income- provision for loan losses + net interest income

= 440740 – 29530 + 615003 = 1026213

Non-interest income = 440740

Fiduciary activities = 108326/ 440740 = 24.58%

Service charges = 77549/ 440740 = 17.60

Fig. 13: Commerce Non-interest income in 2014

(Source: Gruenberg, et al., 2017)

Fig. 14: Industry Non-interest income in 2014

(Source: Gruenberg, et al., 2017)

Commerce Bancshares does not rely on deposits as a source of funds in financing its assets as the industry. The service charges of commerce are lower as compared to those of the industry on the deposits.

Fig. 15: Commercial Loan portfolio

(Source: Gruenberg, et al., 2017)

Fig. 16: Industry Loan Portfolio

(Source: Gruenberg, et al., 2017)

Commercial and industrial loans made up the largest of the industry and in commerce, the unused loan covered the largest part (Penman, 2007). The loan portfolio of commerce resembles that of the industry. Typically, the composition of the loan portfolio in commerce is more diversified than that of the industry.

Fig. 17: Commerce Industry Funding

(Source: Gruenberg, et al., 2017)

Fig. 18: Industry Deposit Funding

(Source: Gruenberg, et al., 2017)

Commerce does not rely on local markets to fund its operation hence leading to lower non-core deposits. Therefore its business strategy focuses mainly on diversifying funding sources and the market liquidity. Core deposits comprise a smaller portion of the funding than that of the industry (Gruenberg et al. 2017). And since commerce is a large bank, it does not rely on the local markets for finance. Unlike, the industry which relies on local markets since it is comprised of the smaller banks which do not have access to the capital markets.

Reference

 Gruenberg, M., Hoenig, T., Noreika, K., & Cordray, R. (2017). FDIC: Federal Deposit Insurance Corporation. Fdic.gov. Retrieved 25 October 2017, from https://www.fdic.gov/

Penman, S. H. (2007). Financial Statement Analysis and Security Valuation (p. 476). New York, NY: McGraw-Hill.

Subramanyam, K. R., & Wild, J. J. (2009). Financial Statement Analysis (10th Ed.). New York, NY: McGraw-Hill.

Equity Multiplier

profit margin

Asset turnover

Net Interest Margin commerce industry 0.0107 0.0309

allowances for losses as a% of assets commerce industry 0.0066 0.0047

loans to core deposits commerce industr y 0.0254 0.7997

loans to asset ratio commerce industry 0.0207 0.5273

non-interest income as a % of operating income

cost efficiency ratio commerce industry 0.6349 0.5494

Equity to asset ratio commerce industry 0.0717 0.1111

2014 commerce non-intrest income fidiciar activities service charges 24.58 17.6

2014 industry non-interest income fidiciary activities service charges 15.0 30.0

commerce Loan portofolio

industry Loan portofolio commercial and industrial loans real estate loans loans to individuals non-current loans 3.44 0.49 0.88 1.95

commerce deposit funding non-core deposit core deposit 45.69000000000001 54.3

industry deposit funding core deposits non-core deposits 79.97 20.03

Return on Equity

Return on Assets