CASE STUDY: YOUNGSTOWN BANK (Adapted from Greenbaum, Thakor, & Boot. 2016. Contemporary Financial Intermediation 3rd Ed.) Introduction John Standard has been the CEO of Youngstown Bank since the summer of 1998. Before taking this position, he had been a vice president of operations for Interbank, a large regional bank. One of the primary reasons that he was hired by Youngstown Bank was his experience with a large operating department. At the time, Youngstown Bank had been going through some difficulties related to inefficient operating procedures, and Mr. Standard had acquired a reputation at Interbank for strong motivational and organizational skills. His management of Youngstown has been almost flawless, and the institutional culture of the bank takes great pride in the fact that the bank is a very tight ship. Youngstown Bank has been in business in Youngstown, Arizona, since 1910. When John Standard was brought in as CEO in 1998, the stock price was at 4, down from a high of 10. The previous CEO was the son of the founder, and he had resisted the replacement of legacy systems with more modern information processing infrastructure, allowing the operating departments to languish in mediocrity. Prior to Mr. Standards arrival, people barely even knew what the banks policies were on loans! The only kinds of products Youngstown Bank offered were simple fixed-rate loans. John Standard changed all that. He put together a set of standard procedures for loans and loan commitments, and attempted to tailor the banks policies to the risk and liquidity needs of its customers. And the stock price responded; by the end of 1999, Youngstown Banks stock price had doubled to $9, and continued to rise through 2000. But starting in 2001, the banks stock price has been languishing. Even though the banks basic structure has not changed and profitability is good, the stock price has simply not moved upward over time, although the stock prices of some competing banks have moved up significantly. The major shareholders in the bank arent too upset yet, but there have been a few grumblings. Standard realizes that there could be major trouble down the line unless he can find a way to get the share price up. He decides to call in his chief financial officer (CFO), Bryan Shelton, to discuss the stock price situation. The Initial Meeting Standard : Come on in, Bryan, and have a seat. Lets get right down to business here. Im worried about our stock price performance lately. Youve been with Youngstown Bank for three years now what was the stock price when you got here? Shelton : It was right around 37, I think. Standard : Well, it is just over 40 now. We closed at 40 yesterday. Thats only 3 dollars in 3 years! What is going on? I dont understand it. Why is our stock price so low? Take a look at how our market-to-book ratio compares with that of our competitors. It is in the dirt! (See Exhibit A). Why? Shelton : Thats a good question. Considering how precisely we control everything, and considering that our profits and cash flows are still looking good, I dont know of any reason why the stock should be down. Im tempted to just say that the market is failing to recognize our value. Maybe theyll come around when we post good numbers again next quarter. Standard : Well, you might be right, but Im uncomfortable. Maybe the market is reacting to something that we dont know about. I think we should look into this some more, and try to get to the bottom of it. [ The meeting ends on that note, and Mr. Shelton says that he will look into the matter carefully and report back. He agrees that they should meet a week later to discuss the issue again. ] The Second Meeting Shelton : Well, Ive looked into this some more, and frankly Im still puzzled. Take a look at these numbers. Our current balance sheet looks good, and compares very favorably with the way it looked during 2000, the heyday of our stock price rise (see Exhibit B). Our key rations look just fine, too, compared to 2000 (see Exhibit C). Moreover, we also seem to be doing well relative to industry averages (see Exhibit D). Standard : This all looks great, just like I thought it would. Look at this one. ( He points at Exhibit D. ) Our return on assets is great. So what do you think? Shelton : Well, one of the people I had helping me to put these numbers together for you suggested that we might want to think about our loan commitments, which dont appear on our balance sheet. Maybe those are dragging our stock price down. Standard : That doesnt make sense. Our policies on loan commitments havent changed, have they? What kind of data do you have on those? Shelton : Well, take a look at these. ( He pulls out Exhibits E and F. ) These show the history of interest rates and the fees that we charge for loan commitments. I checked on the kinds of borrowers whove been buying these commitments, and the quality of the borrowers seems to be in line with our history. To tell you the truth, Im still struggling with what all this stuff means. I dont see that anything has changed anywhere. But our stock price. . . Standard : Well, all I can tell you is keep working on it. See if you can find anything here that will help explain why our stock price is low. Is there something that weve overlooked? Is the bank in some danger that weve failed to realize? [ Again, the meeting ends and they agree to meet in a week. This time, Standard has some specific questions to which he wants answers. Shelton plans to go over everything carefully, looking for some explanation for the poor performance of the stock price, an explanation that takes into account all the facts about the banks situation. ] The Assignment Mr. Standard gives Mr. Shelton these specific questions: 1. Explain the difference between the bank officers and the market perception of the the value of the banks shares. Identify key factors for each position.CASE STUDY: YOUNGSTOWN BANK (Adapted from Greenbaum, Thakor,& Boot. 2016. Contemporary Financial Intermediation 3rd Ed.) Introduction John Standard has been the CEO of Youngstown Bank since the summer of 1998. Before taking this position, he had been a vice president of operations for Interbank, a large regional bank. One of the primary reasons that he was hired by Youngstown Bank was his experience with a large operating department. At the time, Youngstown Bank had been going through some difficulties related to inefficient operating procedures, and Mr. Standard had acquired a reputation at Interbank for strong motivational and organizational skills. His management of Youngstown has been almost flawless, and the institutional culture of the bank takes great pride in the fact that the bank is a very tight ship. Youngstown Bank has been in business in Youngstown, Arizona, since 1910. When John Standard was brought in as CEO in 1998, the stock price was at 4, down from a high of 10. The previous CEO was the son of the founder, and he had resisted the replacement of legacy systems with more modern information processing infrastructure, allowing the operating departments to languish in mediocrity. Prior to Mr. Standards arrival, people barely even knew what the banks policies were on loans! The only kinds of products Youngstown Bank offered were simple fixed-rate loans. John Standard changed all that. He put together a set of standard procedures for loans and loan commitments, and attempted to tailor the banks policies to the risk and liquidity needs of its customers. And the stock price responded; by the end of 1999, Youngstown Banks stock price had doubled to $9, and continued to rise through 2000. But starting in 2001, the banks stock price has been languishing. Even though the banks basic structure has not changed and profitability is good, the stock price has simply not moved upward over time, although the stock prices of some competing banks have moved up significantly. The major shareholders in the bank arent too upset yet, but there have been a few grumblings. Standard realizes that there could be major trouble down the line unless he can find a way to get the share price up. He decides to call in his chief financial officer (CFO), Bryan Shelton, to discuss the stock price situation. The Initial Meeting Standard : Come on in, Bryan, and have a seat. Lets get right down to business here. Im worried about our stock price performance lately. Youve been with Youngstown Bank for three years now what was the stock price when you got here? Shelton : It was right around 37, I think. Standard : Well, it is just over 40 now. We closed at 40 yesterday. Thats only 3 dollars in 3 years! What is going on? I dont understand it. Why is our stock price so low? Take a look at how our market-to-book ratio compares with that of our competitors. It is in the dirt! (See Exhibit A). Why? Shelton : Thats a good question. Considering how precisely we control everything, and considering that our profits and cash flows are still looking good, I dont know of any reason why the stock should be down. Im tempted to just say that the market is failing to recognize our value. Maybe theyll come around when we post good numbers again next quarter. Standard : Well, you might be right, but Im uncomfortable. Maybe the market is reacting to something that we dont know about. I think we should look into this some more, and try to get to the bottom of it. [ The meeting ends on that note, and Mr. Shelton says that he will look into the matter carefully and report back. He agrees that they should meet a week later to discuss the issue again. ] The Second Meeting Shelton : Well, Ive looked into this some more, and frankly Im still puzzled. Take a look at these numbers. Our current balance sheet looks good, and compares very favorably with the way it looked during 2000, the heyday of our stock price rise (see Exhibit B). Our key rations look just fine, too, compared to 2000 (see Exhibit C). Moreover, we also seem to be doing well relative to industry averages (see Exhibit D). Standard : This all looks great, just like I thought it would. Look at this one. ( He points at Exhibit D. ) Our return on assets is great. So what do you think? Shelton : Well, one of the people I had helping me to put these numbers together for you suggested that we might want to think about our loan commitments, which dont appear on our balance sheet. Maybe those are dragging our stock price down. Standard : That doesnt make sense. Our policies on loan commitments havent changed, have they? What kind of data do you have on those? Shelton : Well, take a look at these. ( He pulls out Exhibits E and F. ) These show the history of interest rates and the fees that we charge for loan commitments. I checked on the kinds of borrowers whove been buying these commitments, and the quality of the borrowers seems to be in line with our history. To tell you the truth, Im still struggling with what all this stuff means. I dont see that anything has changed anywhere. But our stock price. . . Standard : Well, all I can tell you is keep working on it. See if you can find anything here that will help explain why our stock price is low. Is there something that weve overlooked? Is the bank in some danger that weve failed to realize? [ Again, the meeting ends and they agree to meet in a week. This time, Standard has some specific questions to which he wants answers. Shelton plans to go over everything carefully, looking for some explanation for the poor performance of the stock price, an explanation that takes into account all the facts about the banks situation. ] The Assignment Mr. Standard gives Mr. Shelton these specific questions: 1. Explain the difference between the bank officers and the market perception of the the value of the banks shares. Identify key factors for each position

EXHIBITES A	YOUNGSTOWN BANK, INC market- to-book ratio comparison
year	youngstown	Banc first	INDUSTRY
1991	0.51	1.21	1.18
1992	1	1.11	1.08
1993	1.43	1.23	1.13
1994	1.47	1.32	1.21
1995	1.60	1.43	1.31
1996	2.13	1.87	1.53
1997	1.35	1.41	1.41
1998	1.18	1.11	1.20
1999	1.35	1.32	1.27
2000	1.41	1.31	1.34
2001	0.21	1.40	1.47
2002	0.95	1.65	1.53
2003	0.81	1.89	1.66
2004	0.78	1.86	1.63

EXHIBITE B

EXHIBIT B	YOUNGSTOWN BANK , INC. Year- end balance sheets (in thounds of dollars
Asset	2000	2005
CASH & DUE	125000	129000
MARKETABLE SECURITIES	200000	400000
LOANS
REAL ESTATE	190000	385000
COMMERCIAL AND INDUSTIAL	315500	744000
CONSUMER	140500	135742
ALL OTHER	131400	142300
LESS UNEANED INCOME
ALLOWANCES FOR POSSIBLE LOAN LOSSES	1316	1500
TOTAL LOANS	776084	1423542
OTHER ASSETS	78000	150000
TOTAL ASSETS	1179084	2102542
LIABILITIES AND EQUITY
LIABILITIES
DEPOSITS	1000020	1775420
FEDERAL FUNDS PURCHASED	75000	102000
OTHER LIABILITIES	63000	90000
TOTAL LIABILITIES	1138020	1967420
EQUITY CAPITAL
PREFERED AND COMMON STOCK	11000	35122
SURPLUS	14064	42000
UNDIVIDED DIVIDEND PROFITS AND RESERVES	16000	58000
TOTAL EQUITY CAPITAL	41064	135122
TOTAL LIABILITIES AND EQUITY	1179084	2102542
NOTE : VOLUME OF OUTSTANDING LOAN COMMITMENTS IN 2000 WAS 1000500 AND 2005 WAS 4320000

EXHIBIT C	YOUNGSTOWN BANK ,INC. Comparison of performance for 2000 and 2005
	2000	2005
NET INCOME(IN THOUNDS OF DOLLARS)	8607	16820
RETURN ON ASSETS(in percentage)	0.73	0.80
TOTAL LIABILITIES TO TOTAL ASSETS 0.94	0.97	0.94
TOTAL LIABILITIES TO COMMON EQUITY	27.71	14.56

EXHIBIT D	Various Industry Ratios for 2005 ( Averages for Similarly Sized Banks)
	Youngstown average	average
return on assets	0.8	0.6
total liabilities to total assets	0.94	0.97
total liabilities to common equity	14.56	21.3

Exhibits E				Interest rate History (Annualized Interest Rates In Percentage)
	jan	feb	mar	apr	may	jun	jul	aug	sep	oct	nov	dec
1991	7.95	8.00	8.00	8.00	8.27	8.63	9.00	9.01	9.41	9.94	10.94	11.55
1992	11.75	11.75	11.75	11.75	11.65	11.65	11.54	11.91	12.90	14.39	14.55	15.30
1993	15.25	15.63	18.31	17.17	15.57	12.63	11.48	11.69	12.23	14.79	16.06	17.10
1994	20.16	19.43	18.05	17.15	19.61	20.03	20.39	20.50	20.06	18.45	16.84	16.75
1995	15.75	16.56	16.50	16.50	15.50	15.50	14.26	14.39	13.50	12.52	11.85	11.50
1996	11.16	10.98	10.50	10.50	10.50	10.50	10.50	10.89	11.00	11.00	11.00	11.00
1997	11	11.00	11.21	11.93	12.39	12.60	13.00	13.00	12.97	12.58	11.77	11.06
1998	10.61	10.50	10.50	10.50	10.31	9.78	9.50	9.50	9.50	9.50	9.50	9.50
1999	9.50	9.50	9.10	8.83	8.50	8.50	8.16	7.90	7.50	7.50	7.50	7.50
2000	7.50	7.50	7.50	7.75	8.14	8.25	8.25	8.25	8.70	9.07	8.78	8.75
2001	7.75	8.51	8.50	8.50	8.84	9.00	9.29	9.84	10.00	10.00	10.05	10.50
2002	9.80	9.10	8.20	7.80	7.20	6.60	5.32	5.01	7.73	5.21	5.09	8.30
2003	9.20	8.30	7.40	7.10	6.20	5.50	5.10	4.80	4.50	6.20	9.10	8.10
2004	6.10	3.00	3.00	3.00	4	6.83	9.23	9.30	10.20	8.50	7.43	8.91

exhibits F	Loan commitment prices ( Average in basis points)
	commitment fee	annual servicing fee	usage fee
1994	12.5	12.5	25.0
1995	12.0	12.0	25.0
1996	12.0	12.0	25.0
1997	12.5	12.0	22.5
1998	12.5	12.5	21.5
1999	12.5	12.5	22.5
2000	12.5	12.5	25.0
2001	12.5	12.5	25.0
2002	12.0	12.5	25.0
2003	12.5	12.5	25.0
2004	14.0	12.5	27.5