How your bank can accelerate from $10 to $20 billion

The Efficiency Ratio Rollercoaster: Buckle Up, It’s a Bumpy Ride

The efficiency ratio measures non-interest expenses (think salaries, tech investments, and snacks in the breakroom) relative to revenue. A higher ratio? Not so efficient. A lower ratio? You’re probably running a tighter ship.

And here’s the kicker: mid-sized banks with assets between $3 billion and $20 billion have been riding the efficiency ratio rollercoaster in recent years, and it’s not exactly thrilling.

Take a look at the chart below, which tracks how efficiency ratios have changed year after year from 2019 through 2023 (side note: yes, there’s some COVID-era noise in here, but we’ll roll with it):

The Trend Nobody Wants to See

The x-axis (horizontal) shows asset size in millions of USD, while the y-axis (vertical) shows the average of how efficiency ratios changed from the previous year.

A positive number means that the efficiency ratio has increased – that is, non-interest costs like personnel and technology grew faster than revenues.  For example, The efficiency ratio of a bank with $5 billion in assets (the first point in the chart) will grow ~2.2% per year on average.  That is… next year, they will be a little less efficient than this year, and the year after that, even less. 

And yes, as soon as banks cross the $10 billion mark, their costs start to grow like there is no tomorrow.

A lot of this cost creep is because once these banks cross that magical $10 billion threshold, the regulatory monster rears its head. Compliance costs explode, throwing a wrench into everyone’s carefully laid growth plans.

This continues until compliance initiatives stabilize and economies of scale (finally, mercifully) kick in.

It’s a bit like running up a very expensive hill in the hope there’s a downhill stretch eventually.

Growth Becomes a Casualty

Here’s where it gets baffling. You’d think banks would go all-in on aggressive growth strategies during this awkward regulatory puberty phase, right? Wrong! The data shows growth actually slows once banks hit roughly $13 billion in assets and continues decelerating thereafter (cue dramatic music). While they should be prioritizing growth to shed the weight of these compliance costs faster, many banks end up wandering in the wilderness.

So, what’s tripping up these would-be titans of banking? Well, it turns out there are a few key reasons

• Growth initiatives often take a backseat because leaders make faulty assumptions about their readiness for life after $10 billion.
  
• They lack the experience, expertise, and spare piggy bank of capital to pursue acquisitions that could supercharge their growth.
  
• They end up diverting valuable brainpower and resources to put out compliance-related fires instead of chasing strategic opportunities.
  
• Many discover, much to their horror, that their current business model isn’t scalable—fragile, “key-man” bottlenecks grind progress to a halt.

In short, despite all the fancy talk about growth, banks stumble into this awkward asset phase unprepared, under-resourced, and a little too distracted.

So… What Should Banks Do About It?

Ah, glad you asked.

A little preparation goes a long way. It’s time to channel your inner Joseph from the Bible—you know, the guy who predicted seven years of fat cows (good times), followed by seven years of skinny cows (not so good times).

Banks hovering around the $10 billion mark should treat their “fat cow” years as a chance to get ready for the “skinny cow” years lurking on the other side of that regulatory cliff.

Here’s how to gear up before things get messy:

1. Stockpile capital (yes, stash that cash early).
   
   Banks should proactively shore up their capital base well before hitting the $10 billion mark to ensure they have the financial resilience to meet increased regulatory requirements and capitalize on growth opportunities. This involves carefully modelling potential compliance-related cost increases and identifying capital shortfalls that could arise during both organic and acquisition-driven expansion.
   
   For banks planning acquisitions, it’s critical to pre-define your ideal capital structure and explore diverse funding sources, such as subordinated debt or preferred equity, to maintain flexibility in turbulent markets.
   
   Practically, a robust capital buffer ensures that your ability to execute strategic growth plans isn’t derailed due to unforeseen financial pressures stemming from this asset-size transition.
   
   
2. Play in the acquisition sandbox and find your “Sweet Spot”.
   
   Smaller acquisitions before the $10 billion threshold can serve as valuable learning experiences, helping you refine your acquisition processes and determine which targets generate the most synergies with your existing operations, brand, and market strategy.
   
   This experimentation phase is about identifying transaction sizes, market geographies, or product specializations that align with your growth aspirations and risk tolerance. For instance, you might focus on acquiring fintech companies to bolster digital platforms or expand your geographical footprint with small community banks.
   
   Ensure you build an internal playbook for acquisition processes and criteria (e.g., due diligence workflows and cultural alignment factors) that can be scaled as you prepare for larger deals.
   
   
3. Streamline M&A (you have to make it look easy).
   
   Smoothly integrating acquired entities into your banking framework is critical to sustaining profitability and growth momentum.
   
   Banks should create a repeatable and standardized approach to post-merger integration, focusing on harmonizing core systems, ensuring cultural alignment, and addressing redundancies or inefficiencies.
   
   Start by building an integration team that includes seasoned leaders from across functions such as IT, compliance, HR, and operations.
   
   Develop a robust communication plan for both employees and clients of the acquired entity to minimize disruption and maintain trust during the transition.
   
   The ultimate goal is to make acquisitions routine and frictionless so your bank can grow efficiently without being bogged down by prolonged integration challenges.
   
   
4. Invest in compliance before it is cool.
   
   Crossing the $10 billion mark triggers significant compliance complexities, including new Dodd-Frank Act stress-testing requirements and heightened regulatory scrutiny.
   
   To prepare, banks must develop a scalable compliance infrastructure before encountering these thresholds. This includes automating compliance-related workflows where possible, appointing experienced compliance officers who can navigate regulatory intricacies, and embedding risk management into day-to-day operations.
   
   Investing in advanced compliance technology, such as AI-driven monitoring systems, can streamline audits, reporting, and examinations. The aim is to ensure compliance becomes a natural part of the bank’s functioning, freeing up talent and resources to focus on growth opportunities instead of firefighting a deluge of regulatory demands.
   
   
5. Buy yourself some time – literally.
   
   To avoid prematurely escalating costs and compliance burdens, banks may strategically delay crossing the $10 billion threshold by pruning their balance sheets.
   
   This involves a thorough review of non-core or underperforming business lines and divesting those that do not align with long-term strategic objectives. For example, a bank might sell off certain loan portfolios, branches in peripheral markets, or other marginally profitable assets.
   
   By reducing asset size temporarily, you not only delay the onset of regulatory pressures but also create an opportunity to optimize your organizational structure, capital allocation, and operational focus before embarking on the next stage of growth.
   
   
6. Make it so Superman can take a day off.
   
   Many banks find that their growth stalls after $10 billion because critical processes or decision-making functions are overly dependent on key individuals whose expertise or availability does not scale.
   
   To prepare for this, banks should conduct a detailed review of their organizational structure to identify these “key-man bottlenecks.” Consider areas such as IT systems, decision-making hierarchies, client relationships, or compliance oversight where a single individual or team may disproportionately bear the burden of responsibility.
   
   Address these vulnerabilities by investing in leadership development, team expansion, and documentation of institutional knowledge through playbooks or processes. Where necessary, implement succession planning for key leaders and ensure knowledge transfer to avoid disruption during growth phases.
   
   
7. Finding engines of growth capable of keeping the bank firing on all cylinders all the way to $20 bi.
   
   Sustaining robust growth beyond the $10 billion mark requires banks to identify and nurture growth engines that can scale effectively.
   
   Evaluate the core strengths of your business model, such as niche lending, wealth management, or digital banking platforms, that can generate significant revenue without a proportional increase in costs.
   
   Diversifying your growth engines can also reduce reliance on any one area of business, for example, exploring fee-based income streams from services like treasury management or partnering with fintech firms to expand digital product offerings. Develop a forward-looking strategic plan that ensures revenue can outpace costs sustainably as your bank grows from $10 billion to $20 billion in assets.
   

I would love to hear about how you are preparing for this growth in the comments below.