Western Independent Banker - March/April 2008 - (Page 12)

sustainability of revenue, whether independence or selling at an attractive price is the long-term goal. Capital management starts with leveraging a bank’s equity base to an appropriate level. After all, the business of banking at its core is about leverage. Often owned by patient investors with low expectations for dividend income, many closely held banks in slow-growing markets retain most of their earnings. Fueled by strong earnings, the capital bases expand to levels well north of 10 percent of assets. While a strong capital position is always good, too much capital can greatly reduce shareholders’ returns. Basic mathematics tells us that the more equity capital a bank has, the poorer its return on equity must be. A bank with capital in excess of 10 percent of assets is going to have a very difficult time achieving the 13-15 percent returns that investors deserve. The surest way for many banks to boost shareholder value is to fi nd ways to leverage their capital toward a goal equity-to- assets ratio of around seven percent. Increasing the size of the bank can often provide a larger lift to return on equity than simply squeezing out a few more basis points of ROA. In other words, many banks will do themselves a great favor by settling for a somewhat lower return on assets if it’s in pursuit of a bigger asset base and a stronger return on equity. Capital management tools include dividend payment levels, share repurchases and conversion to S corporations. Forward-looking banks are especially intent on using capital in pursuit of growth opportunities and development of businesses that provide annuity-like income. They understand that belt tightening will improve results only for a short while. The biggest obstacle to growth for many modest-sized banks is geographic. Banks that do business predominantly in slowgrowth markets have limited prospects for a couple of reasons. It’s tougher to take business from competitors in a market with little growth than to capture a small percent- age share of the growth in a rapidly expanding market. And attracting talent to slowgrowth, rural areas is especially difficult. It is similar to trying to convince grown children to come home to run the family farm after they’ve moved to the big city. Figuring out a way to get a foothold in faster-growing markets, usually more urban markets, is therefore awfully important for banks in rural and agricultural areas. Building branches and bank acquisitions are the most obvious routes for banks in this situation. Neither comes cheaply, of course. But with all the competition that banks face today, hunkering down and holding onto capital will result every time in sinking returns on equity. And that won’t possibly provide the kind of rewards that employees and owners of community banks deserve. Curtis Carpenter is the managing director of Sheshunoff & Co. Investment Banking in Austin, Texas. He can be reached at (800) 279-2241. D 800.824.3700. Financial solutions that enable healthcare clients to reach the next level RE Accounts Receivable Solutions | Asset-Based Financing If your healthcare clients’ balance sheets need improvement or they require additional funds to capitalize on new business opportunities, turn to Medical Capital. We can provide financial solutions that meet current needs and are flexible enough to integrate with strategic plans. Ready to help healthcare providers do more? call 800.824.3700 » WWW.MEDICALCAPITAL.COM Financing the Future of Healthcare 12 360115_Medical.indd 1 www.wib.org Western Independent Banker 1/16/08 8:38:16 PM http://WWW.MEDICALCAPITAL.COM http://www.wib.org

Table of Contents Feed for the Digital Edition of Western Independent Banker - March/April 2008

Western Independent Banker - March/April 2008 Contents A Message from the President & CEO The Forest Through the Trees Differentiating Your Bank Through the Five Senses 51st Annual Conference for Bank Presidents, Senior Officers and Directors Building Franchise Value Deposit Gathering Steps to Determine ROI on a Successful Brand Want to Improve Customer Loyalty? Managing the Change Your Bank Needs to Grow Ten No-Fail Strategies to Create Profit-Rich Growth Niche Banking Rethinking ROI Using The Reserve’s On-Balance-Sheet Sweep to Their Advantage WIB Calendar Welcome New Members Index to Advertisers Advertiser.com

Western Independent Banker - March/April 2008

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