2020 Journal of Community Bank Studies

2020 COMMUNITY BANK CASE STUDY COMPETITION

Figure 5: Net Loans and Leases Growth from 2015-2019 This figure depicts year-over-year¬ net loans & leases growth in percentage terms for F&M Bank and Peer Group 5. Source: UBPR, FFIEC.

distributions and payments. In Figure 6, we notice that F&M Bank is currently over-capitalized as depicted by its high tier one leverage ratio. This equity cushion has permitted F&M Bank to repurchase shares on the open market and retain these shares as treasury stock. Though this operation reduces its capital levels, it benefits existing shareholders in the form of greater earnings per share. Another fact we uncover from Figure 6 is that F&M Bank has a smaller proportion of core capital to risk-weighted assets than PG5. 10 Its lower tier one capital

F&M Bank PG5

16%

12%

8%

4%

Percentage

0%

-4%

2015

2016

2017

2018

2019

Year

non-performing assets from its portfolio. Still, total assets are on track to grow for the eighth successive year. 1.5 Capital Levels A new amendment to Basel III calls for a schedule of increasing “capital conversion buffers” to ensure banks have sufficient capital levels during periods of economic recession (“Capital”). As of 2019, this buffer totaled 2.5% above the minimum regulatory capital ratios. Effectively, the minimum requirements for a “well- capitalized” bank are as follows: Total Capital Ratio > 10.5%, Tier One Capital Ratio > 8.5%, Common Equity Tier One Ratio > 7.0%, Tier One Leverage Ratio > 5.0%.

ratio is tied to the greater amount of non- performing assets on its balance sheet that carry a high credit risk. 1.6 Liquidity Management actively monitors its liquidity position and trusts its Loans Held for Sale are a safe source of liquidity. Loans Held for Sale are

Figure 6: F&M Bank’s Capital Ratios Compared to Basel III & PG5 This figure depicts Tier One Capital and Tier One Leverage Ratio in percentage terms. Effective minimum requirements for a “well-capitalized” bank are represented in Basel III percentages. Source: UBPR, FFIEC.

Basel III F&M Bank PG5

18%

15%

14.8%

13.5%

12%

After analysis of its capital levels, we find that F&M Bank exceeds the minimum requirements for a “well-capitalized” bank. As such, it is not restricted in terms of capital

11.1%

10.8%

9%

8.5%

Percentage 6%

5.0%

3%

0%

Tier One Capital Ratio

Tier One Leverage Ratio

28