Andre D. Galeano is a senior financial-risk professional and former federal banking supervisor with over two decades of experience in the U.S. housing finance system, including direct responsibility for the safety and soundness of more than $7 trillion in financial assets. At FHFA, Mr. Galeano served as Deputy Director of Supervision for Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System, setting supervisory strategy and leading regulatory guidance across capital, liquidity, credit, market, model, and cybersecurity risk. He also served as Chief Risk and Compliance Officer of the Federal Home Loan Bank of Pittsburgh and earlier spent a decade at the FDIC supervising national and state-chartered banks. He currently advises banks at Performance Trust Capital Partners on regulatory developments, supervisory priorities, and balance-sheet risk, translating regulatory signals into actionable insights for executives and boards.
Deploying Capital With Discipline
Opportunities exist to use capital in a structured, board-approved manner that may help improve earnings, support future investment in the franchise and strengthen long-term competitive positioning.
Brought to you by Performance Trust Capital Partners, LLC
*This article appears in the third quarter 2026 issue of Bank Director magazine.
Community bank capital ratios have risen steadily over the past decade. Median tier 1 leverage ratios for banks between $1 billion and $3 billion in assets now sit well above 10%, and total risk-based capital ratios have climbed past 15% for many institutions. This reflects years of earnings retention and conservative balance sheet management. Still, strong capital ratios alone do not generate adequate shareholder returns. Boards should ask a critical question when working on their strategic plan: Is the bank deploying its capital effectively enough to produce the returns the franchise deserves?
Consider two $1 billion banks with identical 15% return on equity targets. Bank A carries a 12% leverage ratio. Bank B carries an 8% leverage ratio. Bank A must generate a 1.8% return on assets to meet that target. Bank B needs only 1.2%. That is a 50% higher earnings hurdle for the bank carrying more capital. Directors should understand that capital is not free: Every dollar of equity that sits underutilized may create an implicit cost to shareholders.
Reducing the Net Overhead Ratio
Many banks focus on the efficiency ratio. However, another measure that deserves more attention is the net overhead ratio: noninterest income minus noninterest expense, divided by average assets. Historically, banks that have a lower net overhead ratio have consistently delivered stronger returns on equity. Certain asset classes, particularly investment securities and structured loan products, can generate meaningful net interest income with little to no incremental operating expense under certain conditions.
On the funding side, certain funding sources carry lower overhead costs per dollar than traditional retail deposits. Brokered deposits, for example, are acquired through established channels, do not require branch infrastructure and can be structured with defined maturities and call features that align with the assets they fund. Federal Home Loan Bank advances offer similar efficiency but require collateralization. When a bank deploys capital by acquiring a portfolio of wholesale assets funded by wholesale liabilities, the incremental revenue may flow directly to the bottom line, while the bank’s fixed operating costs are spread across a larger earning asset base. This can contribute to improvements in the net overhead ratio and may increase overall returns on equity.
Scenario Analysis
No one can predict the future, and thus no capital deployment strategy should be adopted based on single-scenario thinking. When deploying capital, banks should evaluate different combinations of asset classes, funding sources and, where appropriate, capital and derivative instruments across multiple rate and economic scenarios. Banks should be aware of how different strategies impact earnings, capital, liquidity and interest rate risk, along with stressing across multiple credit scenarios.
The ability to explain these strategies is critical. A board and management team that can walk a shareholder or regulator through how a strategy performs across multiple rate and credit environments, and how it impacts the bank’s risk profile, can earn credibility. Banks that do not may face tougher questions.
Governance As the Foundation
Board and management governance are key to executing effective strategies. The board should establish clearly defined risk limits and concentration parameters, and management should report regularly on strategy performance relative to budget and approved thresholds. Enterprise risk management (ERM) and asset/liability committee (ALCO) review of interest rate risk, liquidity, credit quality and earnings impacts should be ongoing. Every investment should have documented prepurchase analysis, and the framework should include escalation and exit criteria if performance deteriorates or risk limits are approached.
Management governance through ALCO and ERM committees ensures awareness of risk positions compared to key risk indicators and policy limits. The governance provides a line of sight into actual versus projected returns. Boards often expect this level of performance monitoring, and regulators do, too.
Concluding Thoughts
Opportunities exist to use capital in a structured, board-approved manner that may help improve earnings, can support future investment in the franchise and may strengthen long-term competitive positioning. Banks that deploy capital with rigorous scenario analysis and strong governance may be better positioned to deliver durable returns over time. Doing so earns the confidence of their shareholders and regulators.
Performance Trust Capital Partners, LLC, is a registered broker/dealer, member FINRA/SIPC. This article is for educational and informational purposes only and is not intended to be legal, tax, financial or accounting advice. This is not an offer or solicitation to purchase or sell securities. The information is subject to change without notice. Investing involves risks, including the possible loss of principal. Past performance is not indicative of future results.
Andre D. Galeano
Andre D. Galeano is a senior financial-risk professional and former federal banking supervisor with over two decades of experience in the U.S. housing finance system, including direct responsibility for the safety and soundness of more than $7 trillion in financial assets. At FHFA, Mr. Galeano served as Deputy Director of Supervision for Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System, setting supervisory strategy and leading regulatory guidance across capital, liquidity, credit, market, model, and cybersecurity risk. He also served as Chief Risk and Compliance Officer of the Federal Home Loan Bank of Pittsburgh and earlier spent a decade at the FDIC supervising national and state-chartered banks. He currently advises banks at Performance Trust Capital Partners on regulatory developments, supervisory priorities, and balance-sheet risk, translating regulatory signals into actionable insights for executives and boards.