First Security Tops List Regardless of Standard

Success can be defined, simply, as the favorable outcome of something attempted.

In the banking industry, however, it’s a little more complicated than that.

“In a given bank, they use any number of ratios to measure good performance,” University of Arkansas professor and J.W. Bellamy Chair for Banking and Finance John Dominick said. “But when we look at banks overall, and community banks in particular, ROA is the best tool, I think.”

Jim Taylor, Northwest Arkansas president of First Security Bank, agreed.

“Forever and ever and ever the benchmark has been ROA,” Taylor said.

“ROA” is short for return on assets, which is a bank’s net income divided by its total assets. ROA, essentially, is a ratio that indicates how efficiently a bank’s assets are employed.

The Northwest Arkansas Business Journal historically has ranked area banks by ROA, and at the top of this year’s list is First Security. Taylor credited the bank’s conservative approach, sound lending practices and geographic diversification within the state for a 2.05 percent ROA.

A 1 percent ROA generally is considered a standard of good performance, “though most banks have not met that metric in recent years,” Dominick said.

Indeed, only five other private banks doing business in Northwest Arkansas had an ROA of more than 1 percent. They were Priority Bank (1.71 percent), Citizens’ Bank & Trust Co. (1.31), First State Bank of Northwest Arkansas (1.24), The First National Bank in Green Forest (1.14) and The First National Bank of Fort Smith.

“That’s basically how we try to measure our profitability,” Liberty Bank Northwest Arkansas regional president Howard Hamilton said of ROA. “It’s the one that’s recognized industry-wide.

“From a competitive basis, that’s the one that lets you know how you stack up.”

Some, however, prefer other standards. One local bank president and CEO said he gauges success by his institution’s return on equity.

The FDIC defines ROE as “annualized net income as a percent of average equity on a consolidated basis.”

Boiled down, ROE also can be explained as a profitability ratio that measures how well equity capital is used.

“ROE is king,” the bank president said. “Ultimately, your ROE — what you’re doing for your shareholders — is your current measure of success.”

Randy Dennis, president of DD&F Consulting Group in Little Rock said he understands why a lot of people measure success by ROA and, to a lesser extent, ROE. DD&F specializes in providing expansionary, risk management and strategic consulting services to financial institutions.

“You’ve got to pick something,” Dennis said with a laugh.

“When I walk into a bank, the first things I look at are capital ratios and earnings,” Dennis added. “Then I look to the asset quality. What level of troubled assets are there?”

Dennis also said there are pitfalls associated with any single means of measuring, whether it’s ROA, ROE or efficiency ratio. The most meaningful signs of success are “good capital, good steady earnings over time,” he said.

Not surprisingly, First Security fits that description.

“First Security has always done well. Reynie Rutledge runs a good bank,” Dennis said of the chairman and CEO of First Security Bancorp Inc. “For a long time people thought it was just Reynie, but he’s really built a great banking team.”

The success of Rutledge and his team led Dennis to yet another, though admittedly more nebulous, measuring stick.

“We haven’t even talked about market perception,” Dennis said, laughing again. “We’ll save that for another time.”