What Makes A Great Bank Great?

This issue contains our annual Bank Performance Scorecard, which is a ranking of the 150 largest publically owned U.S. banks and thrifts based on a formula that measures the three qualities of a good bank: profitability, capital strength and asset quality. There are a small number of banks that don’t fit this template very well-Bank of New York Mellon Corp. and State Street Corp. come to mind-because they take little, if any, credit risk. For most of the industry, however, our Scorecard is a fair judge of those things that banks need to be good at.

We’ve changed some of the metrics since our first Scorecard was published in 2005, although return on equity and return on assets have remained constants. We’ve thought of adding others, like efficiency ratio or loan-to-deposit ratio, although I’ve always worried that if we went deeper with our analysis-using, for example, a metric like net non-core funding deposit ratio, which measures how dependent a bank is on hot money for its funding-we would begin to make value judgments driven by personal bias. Having a low loan-to-deposit ratio and a high percentage of core deposits are two characteristics of a “safe institution,” but they are not the only-or even the most important-performance metrics to look at. To my way of thinking, a good bank is well (but not over-) capitalized, makes sound lending decisions and is highly profitable. In the dynamic environment they operate in today, bank CEOs and their boards need some freedom as to how they do that.

Of course, banks are more than their numerical values on a ranking. For example, the winner of this year’s Scorecard-Atlanta-based State Bank Financial Corp.-had the best combination of scores in the five categories that we use to measure performance. But the arithmetic doesn’t tell you how the bank did that. For that you must dig deeper.

There are a variety of subjective (which is to say non-numerical) standards we could use to identify what makes a great bank great (or even very good), and I’d like to propose three that I think point to some underlying truths about bank performance.

The first one is consistency. A great bank doesn’t excel in just one year, but over a span of years. By this standard, State Bank has not yet reached the level of greatness because it is the product of a recent series of intelligently-conceived and well-executed acquisitions of failed banks from the Federal Deposit Insurance Corp. It simply hasn’t been around long enough to stand the test of time. A good example of consistency is First Financial Bankshares in Abilene, Texas, which placed 2nd on the Scorecard this year, 1st in 2010 and 2nd in 2009. An even better example is Honolulu-based Bank of Hawaii Corp., which has never placed lower than 13th (its ranking this year) in the six years we’ve published the Scorecard. It won the ranking in 2005 and also placed 4th in 2009, and has been a model of consistency-a track record attributable to former CEO Al Landon, who retired in 2010.

The second standard is leadership. High performing banks invariably have outstanding CEOs and strong, highly engaged boards. If State Bank Financial does someday become a great bank, the leadership of CEO Joe Evans will be a big reason why. Not only is Evans an excellent dealmaker, he’s a first-rate banker who is laying the foundations of the kind of institution that should do well on the Scorecard in years to come. I think Evans and his directors are building their bank the right way.

The third standard is a very specific kind of knowledge. Great banks understand their customers and their markets extraordinarily well. They know what their customers want, and they create a value proposition that makes their customers both happy and loyal. Interestingly, there are two examples of this in the 2011 Scorecard-and the banks could hardly be more different! City Holding Co. in Charleston, West Virginia, which placed 3rd, has nearly double the industry average in households-per-branch because it offers the kind of products and services the state’s middle-income families want. (It’s not as though there aren’t plenty of other banks in West Virginia, because there are.) The other example is First Republic Bank, which placed 4th, just three points behind City Holding. First Republic provides private banking services to the financial elite in places like Boston, New York and San Francisco, where it is headquartered. First Republic’s customers demand a level of service that few banks provide nowadays, and it delivers. First Republic knows what its customers want, how they want it and when they want it.

These aren’t the only characteristics of a great bank, for sure. But I think the intersection of consistency, leadership and knowledge is a good place to start.


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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