REPORT ON

U.S. BANK OF WASHINGTON

(The Redhook Ale Brewery)

GROUP NO: 2

BHASKAR JAIN – 105

ARVIND KUMAR – 153

SUHAS ANJARIA – 202

ABHISHEK SHAH – 319

SIDDHARTH LAHOTI – 409

MANSI AGRAWAL – 502

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Performance of US Bank in comparison to all US insured Commercial Banks:

To analyze the performance of US Bancorp, several financial parameters have been calculated and then compared with the industry benchmarks. The parameters taken into consideration are: ROA, ROE, gross interest income, net interest margin, retained earnings and cash dividends. Also, revenues earned from different industries have been compared with the industry standards to highlight the sectors preferred by the US Bancorp. All the analysis has been done for the years 1987, 1988 and 1989.

Apart from this the following analysis has also been done for the year 1990-1994.

Cash flow analysis for the Redhook Ale Brewery loan application Bank’s exposure to additional risk in case they accept the loan application Analysis of Balance Sheet and P/L for Redhook Ale Brewery

Interest Earning Assets: For the industry, the interest earning assets recorded a rise in 1988. However, there has been a stable growth in the specified period. Observing the performance of US Bancorp, the interest earning assets declined in 1988 and saw a sharp rise in 1989.

Loans: The earnings from loans for US Bancorp have been significantly higher than the industry benchmarks. The loan earnings have shown a consistent growth in these three years.

Commercial and Industrial: The industry earnings from this sector are very low in comparison to the US Bank, which has recorded a continuous rise. This reflected that the US Bank focused more on the industrial and commercial sectors.

Although the real estate and C&I sector saw a declining trend in the number of loans advanced, the US Bancorp was focused for a majority part of its revenues from these two sectors.

Real Estate: The earnings from this industry have almost been similar for the US Bank and all the other Banks.

The real estate sector saw a slight decline in the loan advanced owing to the Real estate crisis of 1980-90.

Consumer: The % earnings from this sector have seen a downward trend. However, in comparison with the other players, the earnings for US Bank have been relatively higher.

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Foreign Government: Industry standards were way higher than that of US Bank for the foreign government loan advances. This implies that the US Bank restrained from lending money to foreign governments.

Deposit Liabilities: The deposit liabilities for the US Bank were less than the industry. Also, US Bancorp has witnessed a gradual fall in these liabilities. This can be seen from the growing trend to invest in other opportunities available to the investors.

Gross Interest Income: The earnings of the US Bancorp have been higher than the industry average of other banks. Also, the earnings have observed a continuous growth reflecting efficient performance of the bank.

Gross Interest Expense:Along with the gross interest income, the expenses have also seen a rising trend for the US Bank. The average industry expenses are lower.

Income before tax: The IBT has recorded an upward trend for the US Bancorp. Also these earnings were higher than the industry standards. This was primarily due to the better working practices being adopted and more focus on automation. This not only decreased the working force but also made faster access to resources.

Net Income: Similar to the IBT, the net income has also been growing for the US Bank. Also, higher values than the industry average reflect that the Bank is performing better than most of the other commercial banks.

Cash Dividends:US Bancorp has been paying dividends to its investors to retain their confidence. However, the dividends paid are less than the industry average, but increasing by over 53% over the span of 3 years from 1987 to 1989.

Net Retained Earnings: The US Bancorp has been maintaining high cash reserves so that it does not face operational obstructions. Because of higher retained earnings, the dividends paid out have been less than the industry standards.

Return on Assets: The % return on assets for the US Bank has been higher than the industry, reflecting a better performance than most of the banks.

Return on Equity: The US Bank has witnessed a continuous rise in the ROE. Moreover, the ROE has been significantly higher than the average industry ROE.

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Exhibits and analysis:

1987 1988 1989 1987 1988 1989

Interest-earning assets 86.62 87.94 87.84 84.65% 83.59% 85.07%Loans 58.36 60.59 61.3 64.92% 67.27% 67.21%Commercial and industrial 20.04 19.55 19.2 53.68% 54.33% 55.84%Real Estate 18.69 20.56 22.18 21.49% 22.67% 22.15%Consumer 11.1 11.31 11.4 21.54% 20.09% 18.56%Foreign Government 1.34 1.23 1.03 0.19% 0.23% 0.33%

Deposit liabilities 76.43 76.22 76.01 75.28% 74.37% 70.00%

Industry US Bancorp

Item 1987 1988 1989 1987 1988 1989

Gross Interest Income 8.34 8.95 9.92 8.64% 9.67% 9.95%

Gross Interest Expense 4.95 5.42 6.41 5.37% 6.02% 6.48%Net Interest Margin 3.4 3.53 3.51 3.27% 3.65% 3.47%Income before tax 0.28 1.14 0.8 1.32% 1.54% 1.60%Net Income 0.11 0.84 0.51 0.96% 1.03% 1.04%Cash dividends declared 0.36 0.44 0.44 0.25% 0.33% 0.31%Net retained earnings -0.24 0.4 0.07 0.71% 0.70% 0.74%

Industry US Bancorp

1987 1988 1989 1987 1988 1989

Return on Assets 0.11 0.84 0.51 0.9 0.92 1

Return on Equity 1.8 16.52 7.94 13.39 13.78 15.12

Industry US Bancorp

Note:

1. All figures are in % 2. The data has been taken from the Exhibits provided in the case study

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Interest earning assets for bank

interest earning asset-1987

Money market investmentInvestment securi-tiestrading account securitiesMortgages held for saleLoans

interest earning asset-1988

Money market investmentInvestment securi-tiestrading account securitiesMortgages held for saleLoans

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interest earning asset-1989

Money market investmentInvestment securi-tiestrading account securitiesMortgages held for saleLoans

Interest earning asset for U.S. Bancorp have increased from $11,302,2671 in year 1987 to $16,975,382 in year 1989, this increase was due to decrease in money market investment and increase in investment security, investment in trading account security and by giving more loans. Loans accounts for major part of the total interest earning assets. It was also found out proportion of loans out of interest earning assets have increased from 76% to 80% in 1988 and then slightly decreased to 79% in 1989

U.S Barncop loan portfolio consists of following loans:

Year 1987 1988 1989Amount in 1000$Total loans 8668.730 9676.1 11409.464Commercial 53.67% 54.32% 55.84%Real estate construct 5.6% 6.5% 6.7%Real estate mortgage 15.8% 16.15% 15.44%Consumer 21.53% 20.09% 18.5%Foreign .19% .23% .32%Leasing Finance 3.1% 2.67% 3.11%

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U.S commercial Bank, Loans account for over 61% of the total assets, up from 58.5% in 1985. The increase in loan portfolio was result of strong growth in real estate loans and consumer loan and decrease in commercial and industrial loan. Increase in residential loan is due to shrinking of the drift industry and Shift from commercial to real estate loan is due to higher perceived risk in commercial sector and recession climate of 1990, led banks to increase margins for business loan which had tightened the bank credit term and standard and reduce in C&I loan growth.

As can be seen from above ,loan portfolio of US Barncop, commercial loan have increased from 1987 to 1988 so it is riskier to further invest in this sector because of the current market condition and increase in competition for real estate sector. Therefore it is recommended not to invest in the Redhook Ale Brewery expansion project

Debt Service Coverage Ratio (DSCR)

DSCR 1989-90 1990-91 1991-92 1992-93 1993-94

PAT 455243.00 1122512.00 1558057.00 2203490.00 6505044.00

Depreciation 299340.00 299340.00 309102.00 1555258.00 1317911.00

Interest 110934.00 95079.00 203982.00 771536.00 600332.00

Sub Total (A) 865517.00 1516931.00 2071141.00 4530284.00 8423287.00

Interest 110934.00 95079.00 203982.00 771536.00 600332.00

Principal Repayment 129669.00 146620.00 158418.00 815740.00 1496557.00

Sub Total (B) 240603.00 241699.00 362400.00 1587266.00 2096889.00

DSCR 3.60 6.28 5.72 2.85 4.02

Average DSCR 4.49

DSCR ratio is showing a good loan obtaining capacity but it has fluctuating value.

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Projection

Current Ratio = Current assets/Current liabilities

Year Current assets/Current liabilities

1990 5,050,895/520,737 9.69951991 4,791,830/684,031 7.00521992 1,315,169/871,673 1.50871993 4,188,730/1,574,317 2.66071994 11,635,090/2,662,829 4.3694

1 2 3 4 5

1990 1991 1992 1993 1994

9.6995 7.0052

1.5087

2.6607

4.3694

Current Ratio

Quick Ratio = Current Assets – Inventories & Prepaid expenses / Current liabilities

1990 (5,050,895 – 428,457)/520,737 8.87671991 (4,791,830 – 613,577)/684,031 6.10821992 (1,315,169 – 874,742)/871,673 0.50531993 (4,188,730 –

2,084,912)/1,574,3171.3363

1994 (11,635,090 – 3.0298

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3,567,349)/2,662,829

Current ratio and quick ratio are very volatile but they are showing good liquidity.

Debt to Equity Ratio = Total long term debt / shareholder’s Fund

1990 861,689/7,088,831 0.12161991 732,019/8,211,343 0.08911992 6,750,400/9,769,400 0.69091993 5,951,983/11,972,890 0.49711994 4,476,2437/18,477,933 2.4225

1

0.1216 0.0891

0.690900000000001

0.4971

2.4225

Debt Equity Ratio1990 1991 1992 1993 1994

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Analysis of Company Cash Flow

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Analysis

We would not recommend accepting the loan application for Redhook due to the volatile nature of cash flows.

They fluctuate between positive and negative cashflows. The company might be able to survive the two years of negative cash flows by financing

through the reserves but it is not feasible for US bank to disburse a loan of this amount based on uncertainity.

Since returns are risky at a floating rate of interest, this loan would not be viable for Us bank of Washington

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