Shareholder Value

The value of an asset is a function of the future benefits to be derived from its ownership. In finance, these benefits are the cash flows that drive shareholder distributions. In banking, profitability drives the regulatory capital that, in turn, drives shareholder distributions and value.

Focusing on community service can limit a bank's profitability and its intrinsic value as a stand-alone, going-concern. Acquisition prices commonly reflect a premium to the intrinsic value of a community bank. Acquirers are willing to pay a premium because they can operate the bank as a branch with less capital and lower costs.

In light of these premiums, the view could be that shareholders are not maximizing the value of their investment. But ownership provides intangible benefits, as evident from the reasons for organizing the bank. Consideration of such benefits is valid when making investment decisions and is consistent with accepted economic and financial theory.

A community bank's intrinsic value and its potential acquisition price can both be estimated. The difference between the two is the value implicitly attributable to the intangible benefits. Tools are available to maximize shareholder distributions and narrow the gap between intrinsic value and acquisition price. The resulting shift in value from the intangibles of ownership to the underlying investment improves the bank's ability to remain independent.

trust preferred financing, economic theory, shareholder value, corporate finance