Banking’s Secret Sauce

Every year for the past several years, Bank Director magazine has published the Bank Performance Scorecard, which is a ranking of the 150 largest publically traded banks and thrifts in the country based on the holy trinity of profitability, capital strength and asset quality. We’ve also introduced a new ranking in the current issue called The Bank Director Nifty 50, which attempts to identify those institutions that are the best users of capital. By users, we mean institutions that deliver above average returns at a time when banks and thrifts are required to carry much higher levels of capital than they have historically.

Rankings like these seem appropriate to me because banking is a numbers driven business, and for the most part, the numbers don’t lie when you’re trying to separate the sheep from the goats. But they don’t tell the entire story, either. Over the years that we have run our Bank Performance Scorecard, I have developed a short list of characteristics or traits that most top ranked institutions have in common. My list probably won’t tell you anything you didn’t already know, but sometimes it’s the simplest truths that are the most profound and the easiest to forget.

I think the recipe for success (as defined by your institution’s financial performance) begins with leadership. I’ve had the opportunity to interview many of the chief executive officers at our top ranked banks down through the years and they all have impressed me as highly skilled managers who were backed by engaged and knowledgeable boards. I’m thinking of two CEOs in particular: Joe Evans at State Bank Financial Corp. in Atlanta and Scott Dueser at First Financial Bankshares in Abeline, Texas.

State Bank was the top ranked bank on the 2011 Bank Performance Scorecard, while First Financial placed 2nd in 2011 and 1st in 2010. First Financial also placed 2nd on the Nifty 50 best users of capital ranking, and State Bank 5th.

Evans and Dueser are different men with different personalities from different parts of the country, and yet when you talk to them you can’t help but be impressed by how well they understand their markets, their strategies and what it takes to be successful. There is a wide arc that runs from strategy to execution, and both CEOs are very comfortable at any point along that arc. They are strategists who can execute.

A second ingredient is a sustainable strategy that accomplishes two very difficult things in banking-avoids activities that entail excessive risk, but also escapes the wasting effects of commoditization. We all understand the dangers of taking too much risk. Several of the large bank failures we saw during the recent financial crisis were the result of high risk home mortgage lending. Many of the community bank failures were tied to excessive concentrations in commercial real estate, specifically land acquisition and development loans. Commoditization is a different kind of risk. Most bank products tend to look the same and be priced the same, which creates a reasonably efficient market for the consumer-and a commoditized, low-margin return for the institution. That erodes franchise value over time.

Many of our top-ranked banks have somehow managed to avoid both traps. State Bank was created with great skill by Evans and his management team through a series of failed bank acquisitions from the Federal Deposit Insurance Corp. First Financial is a highly accomplished acquirer that treats mergers and acquisitions as a line of business. Neither bank takes excessive credit risk, and they’ve both created the kind of strategic differentiation that helps them skirt the tar pit of commoditization.

A third ingredient is organizational clarity. High-performing institutions seem to have a shared understanding, beginning at the board level and flowing down throughout the entire organization, about what it takes to be successful. The board and senior management are fully aligned on the institution’s strategy, and management knows precisely what levers need to be pulled to deliver optimal performance. The entire organization rides that arc between strategy and execution like a train on rails.

There are other traits that most successful banks and thrifts share. They tend to be pretty efficient and are good at lending, so they don’t waste money or lose money in amounts that become material. They also tend to be situated in favorable geographic markets, although this can change over time. But I don’t believe these additional characteristics alone are sufficient. If there is a secret sauce of high performance in banking, it would seem to be a blend of leadership, strategy and organizational clarity. The ingredients are simple enough, but when skillfully combined the taste is divine.


Jack Milligan


Jack Milligan is editor-at-large of Bank Director magazine, a position to which he brings over 40 years of experience in financial journalism organizations. Mr. Milligan directs Bank Director’s editorial coverage and leads its director training efforts. He has a master’s degree in Journalism from The Ohio State University.

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