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Taking a Look at Return on Equity

2 min read

Todd Smith of Commercial Bank & Trust in Monticello looks at banks’ return on equity as just one gauge of how well an institution is doing.

It’s not as solid an indicator as return on assets, Smith said last month.

“We’ve always been efficient when it comes to leveraging the bank’s equity capital,” he said, one reason for his bank’s No. 4 ranking among Arkansas-based banks in ROE last year.

“When 2023 turned out to be a decent year for profits, ROE followed suit,” said Smith, whose bank grew substantially last month by merging with its sister bank, First State Bank of Warren.

The Ryburn family of Monticello owns about 80% of the merged bank.

Commercial Bank had 2023 ROE of 32.86%. Its return on assets was 1.32%, and it had annual net income of $3.92 million.

Piggott State Bank topped the ROE list with an astounding 55.81%, but insiders said that figure was artificially inflated by an accounting principle that takes out equity losses in the bank’s bond portfolio. ROE percentages end up looking better than they would otherwise. First NaturalState Bank of McGehee had a similar ROE percentage, 51.61%.

Connect Bank of Star City was next at 32.89%, and Commercial’s crosstown rival Union Bank & Trust Co. of Monticello followed at No. 5 with 30.94%.

ROE indicates how well a bank is doing for its investors, but banks do not necessarily pay their owners the same percentage in dividends. The median ROE percentage for Arkansas banks last year was about 11%.

Commercial is a Subchapter S bank, in which shareholders are limited partners with the bank for tax purposes.

Commercial’s 2023 performance “naturally resulted in distributions to shareholders,” Smith said in an email. “Asset quality is a hallmark of sustainable, strong performance because prudent underwriting means fewer losses for the bank, and the responsible deployment of credit” to customers, Smith said. He claims no secret elixir. The bank simply applies conservative balance-sheet management and takes a long-haul approach.

“It’s just being responsible and efficient with shareholders’ equity,” Smith added. “As a Subchapter S bank, we have the desire, but not the obligation, to return as much of our income to our shareholders as we can. That’s not just to reward their investment, but to help them service their elevated income tax. We do that, but we try to strike the right balance with retaining capital to allow for the bank to grow and build that cushion.”

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