The value of a bank, defined by the ratio of market value to common equity, is directly related to the return on equity (ROE) less the cost of equity capital (COE).

1. Creating Shareholder Value in
Midcap Banks
The Benefits of Living on the Positive Valuation Slope

2. The mission of a bank is to operate a safe and sound
financial institution, while creating shareholder value.
The value of a bank, defined by the ratio of market value
to common equity, most often is directly related to the
return on equity (ROE) less the cost of equity capital
(COE). The enclosed chart illustrates the benefits of
living on the slope, or realizing a higher market value to
common equity as the spread between ROE and COE
increases.

3. The Market Capitalization/Book Common Equity compared
to IDC’s ROE less COE for midcap bank holding companies in
the enclosed chart demonstrates the usefulness of a cost of
equity capital tied to the long term U.S. Treasury yield to
determine the price to book value. IDC defines ROE as net
operating profit after tax (NOPAT ROE). The level of long
term bond yields, size of the bank, and standard deviation
of the operating margin (inverse to the efficiency ratio)
define risk in calculating COE.

4. The benefits of a high market capitalization to common
equity are twofold. As an example, one benefit is
Signature Bank (SBNY) sells at a market value equal to 2.8
times equity due to a spread of ROE less COE of 9.2%.
The second benefit is a high ROE generates a high
reinvestment rate or growth in common equity, thereby
increasing market value at the reinvestment rate.

5. Signature bank totes a simple business model stressing loans
and deposits with only a few branches. Their customers tend to
be private businesses and high profile individuals. The bank,
with $32 billion in assets, has a very clean balance sheet and
very low noninterest expense when compared with its peers.
Although heavily weighted in commercial real estate loans,
Signature Bank has been able to maintain low levels of non-
performing assets. They also prefer to avoid high-risk
derivatives. All of these helped to fuel 25 consecutive quarters
of earnings growth, which, in their case, led to increasing share
values; their share value increased 453% in the last decade and
outperformed peers.

6. For further information please feel free to visit our website at
www.idcfp.com or contact us at 800-525-5457 or info@idcfp.com.
SBNY