2023 Community Bank Case Study Competition Journal

THIRD PLACE: Messiah University

total assets at merger-close in September 2023 to exceed $3 billion. An important metric to track asset growth is earning assets as a percentage of total assets which is shown below in Figure 4. Earning asset percentage is calculated by adding net loans and leases to investment securities, divided by total assets. As shown, in 2018 earning assets represented 40% of total assets, then quickly rose to 91.5% and 94.9% in 2019 and 2020 respectively. Post merger, the earning asset percentage dropped to 87.9%, and increased slightly to contribute to 88.9% of total assets at year-end 2022. Capital Levels As The Basel III Accord is implemented this year, capital level requirements will be tightened for several capital metrics. Included in these changes is Tier 1 Capital must be at least 6% of risk-weighted assets (RWA), and total capital must be at least 8% of RWA. To be considered “well-capitalized”, a bank’s Tier 1 Capital Ratio and Total Capital Ratio should

be greater than 8.5% and 10.5% respectively. After analysis of LINKBANK’s capital levels, we find that they exceed the requirements to be considered “well-capitalized” with the Tier 1 Capital Ratio sitting at 12.4% and Tier 1 Leverage ratio at 10.9% as shown in Figure 5 below. Liquidity Over the last five years several macroeconomic changes have led to a change in trends for bank liquidity. In 2020, liquidity increased for community banks due to injections of government stimulus, lower spending etc. however, in the last year, liquidity declined as banks shifted from cash and cash equivalents to less liquid assets, to compensate for increased funding costs due to rising interest rates. Thus, it is paramount for banks to have non-interest bearing deposits. Figure 6 shows the growth of non-interest bearing deposits over the last several years. Since 2020 when funding costs were minimal, non-interest bearing deposits accounted for 15% of all deposits at LINKBANK, this grew to 17% in 2021, and 22% in 2022. Because of LINK’s history of aggressive loan

growth, having these non interest bearing deposits is crucial. These deposits effectively serve as a free loan to the bank, and they are preferred by both the bank and regulators, because they are subject to far less scrutiny. The Loans-to-deposits ratio in Figure 7 is a comparison of LINK’s LTD ratio compared to

Figure 5: Capital Ratios Compared to Basel III Well-Capitalized Levels

10.0% 12.0% 14.0%

12.4%

10.9%

8.5%

0.0% 2.0% 4.0% 6.0% 8.0%

5.0%

Tier 1 Leverage Ratio

Tier 1 Capital Ratio

Basel III

LINKBANK

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