June 16, 2020
Rules vs. Exceptions

For every rule in banking there is an exception.

Here are three examples.


As a general rule, the more capital a bank holds, the more likely it is to survive an unexpected crisis — like the one unfolding now.

“What capital does is allow you a margin for error,” says Brent Beardall, CEO of Washington Federal, a $17.4 billion bank in Seattle. “It lets us go home and sleep well at night.”

Yet, other banks with similar track records take a different approach.

“Most banks in our peer group operate with around 10% of capital. We’re between 8% and 9%,” says Jim Reuter, CEO of FirstBank Holding Co., a $20.3 billion privately held bank based in Lakewood, Colorado. “We don’t want to be at 10%. … As long as we continue to put on the right kind of assets, we think that’s the best way to run the bank.”


As a general rule, it’s best to make acquisitions at the bottom of a cycle, when potential targets trade for a discount to book value.

"To be an acquirer during boom times [is] to be foolish, to commit the cardinal sin of overpaying,” wrote Duff McDonald in Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase. “But to pick off distressed assets in a lousy economic climate — that [is] the stuff of the empire builder."

Yet, plenty of active acquirers have done well over time by paying premiums for well-run banks in ordinary times.

Glacier Bancorp has produced more shareholder value over its life as a publicly traded company than any other bank. It’s done so in part by completing 28 acquisitions since 1990, only one of which benefited from a crisis-induced discount.

“It's far better to buy a wonderful company at a fair price,” Warren Buffett says, “than a fair company at a wonderful price.”


As a general rule, people associate efficiency with expenses.

"Being a low-cost provider gives one a tremendous strategic advantage,” according to former U.S. Bancorp Chairman and CEO Jerry Grundhofer. “It allows you to deal with challenges, be competitive on the asset and liability sides of the balance sheet, and take care of customers."

Yet, efficiency in banking is less about expenses than it is about revenue.

This is simple math. Most banks generate twice as much revenue as they do expenses. So if a bank wants to lower its efficiency ratio — expenses divided by revenue — it’ll get twice as much bang for its buck by growing revenue.

“Everybody tends to think of the efficiency ratio as this measure of an organization as a highly disciplined expense management strategy or process,” says David Findlay, CEO of Lakeland Financial Corp., a $5 billion bank based in Warsaw, Indiana. “And I used to think that way, but now what we think at the bank is that the efficiency ratio is as much a measure of our ability to generate new revenue as it is to effectively manage expenses.”

John J. Maxfield / editor in chief of Bank Director