Arkansas National, Bank of Rogers Lead in ROE

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Although return on assets is the most-often-used measurement of a bank’s financial health, return on equity is usually more important to shareholders.

“As a shareholder, that’s my favorite number, my favorite three letters,” Dan Dykema, president of Arkansas National Bank in Bentonville, said of ROE. “You’ve got to have a decent ROA, but return on equity is what it’s all about. Typically, the higher the ROE, the stronger the stock price is going to be in multiples of earnings, multiples of book, whatever you’re going to use.”

ROE is earnings divided by equity. Equity, in this case, refers to capital, surplus and undivided profit.

ANB had the highest ROE of all the banks in Northwest Arkansas last year. The bank’s ROE was 32.6 percent, or 21.5 percent when the “S” corporation’s numbers were adjusted to “C” corporation tax rates to allow an apples-to-apples comparison.

“C” corporation earnings are taxed at 34 percent on the federal level. If dividends are paid to shareholders, the individual shareholder is taxed another 15 percent on the receiving end, meaning they receive about half of the amount of the declared dividend. “S” Corporations aren’t taxed on ROE, but individual shareholders would have to pay as much as 36.9 percent in taxes on ROE.

“We don’t get double taxed on our earnings,” Dykema said. “All our earnings are taxed on the individual shareholder level … It’s easier to distribute out more money because the tax burden is less.”

Dykema said ANB tries to maintain a good ROE number to keep its 60 shareholders happy. The bank currently has $44 million in equity.

“It’s something we’re fortunate enough that we can manage the equity number a little bit,” Dykema said. “We keep that capital number low, so that jacks up the return-on-equity number.”

Dykema said Arkansas National’s ROE has improved every year since the bank was founded in 1994.

“If we were selling stock, it would probably be attractive to potential shareholders, but we’re not [selling stock],” he said.

Bank of Rogers was second in the area with a ROE of 18.3 percent. That’s nothing to sneeze at even if it is hay-fever season.

“We’ve been very profitable the last few years,” said Dick McLelland, president of the Bank of Rogers. “That’s why our ROE is so high. But it’s kind of a skewed figure because equity can vary so much from bank to bank.”

The Bank of Rogers has about $9 million in equity, he said, so a return of 18 percent is good for shareholders. Last year, for the first time in its eight-year history, the Bank of Rogers paid a dividend to its shareholders.

Top 10 ROEs
The following had the best local ROEs among private banks in 2003:

Rank — Bank — City — % ROE

1 — Arkansas National Bank* — Bentonville — 21.53%
2 — Bank of Rogers — Rogers — 18.30%
3 — First Security Bank — Fayetteville — 14.93%
4 — Chambers Bank* — Danville — 13.81%
5 — Benefit Bank* — Fort Smith — 13.67%
6 — First State Bank — Fayetteville — 13.65%
7 — Community First Bank — Harrison — 13.22%
8 — Decatur State Bank* — Decatur — 12.91%
9 — Citizens Bank & Trust Co. — Van Buren — 12.63%
10 — United Bank* — Springdale — 12.23%

Notes: ROE-return on equity. Figures are bankwide and are adjusted for taxes.

Source: Bauer Financial Inc. of Coral Gables, Fla., and the Uniform Bank Performance Report published by the Federal Deposit Insurance Corp.