The Story of Two Bank Transformations

If a company doesn’t continuously improve and transform itself, it can’t stay competitive.

This is true regardless of the industry, but it’s especially true today in banking. A combination of low interest rates, high compliance costs and customer migration toward digital banking channels has led institutions across the country to rethink their business models.

Two banks attacking this head-on are Dime Community Bank, a $6.4 billion bank based in Brooklyn, New York, and Horizon Bancorp, a $5.2 billion bank based in Michigan City, Indiana.

That’s why Bank Director invited their CEOs, Ken Mahon and Craig Dwight, respectively, to share their thoughts at its 2019 Bank Compensation & Talent Conference, taking place this week at The Ritz-Carlton Hotel in Amelia Island, Florida.

Mahon explained that even though Dime’s history dates back to 1864, right around the time that the national banking industry began to take shape, it is in the last few years that things have gotten particularly interesting.

For most Dime’s existence, it was a monoline multifamily lender serving the New York City metropolitan market. But lending margins compressed and compliance and technology costs climbed, causing Dime to transition into a full-service commercial bank.

It was clear to us that the community commercial bank model enabled the possibility of a more-diversified balance sheet and better returns for shareholders in the future, reflected in the form of higher returns on equity and better trading multiples to book value and earnings,” Mahon explains.    

With this in mind, Dime’s strategic plan revolves around improving four fundamental balance sheet metrics: growing checking account balances, increasing low-cost business deposits, growing relationship-based commercial loans with better risk-adjusted returns and reducing its commercial real estate concentration ratio.

Transforming a balance sheet may seem impersonal, but the ability and success of doing so boils down to the bank’s recruiting, retaining and incentivizing the right people. Dime has started with attracting seasoned lenders from other banks. Also, from its executive team down to its customer-facing staff, the bank has focused its incentive plans to promote low-cost deposit gathering.

The proof is in the pudding. Dime’s newly formed business banking division has originated over $900 million in relationship-based loans and sourced over $225 million of low-cost deposits since its formation just two years ago.

Horizon Bank is undergoing its own transformation, but it’s taking a different route. The bank is  using mergers and acquisitions to build scale and boost its efficiency.

Since 2002, Horizon has completed 14 acquisitions, building out its branch network throughout its home state of Indiana, as well as moving into its neighbor to the north, Michigan.

Horizon’s most recent acquisition, of Salin Bancshares, offers a case in point. It added nearly $1 billion in assets and $741 million in deposits to the Horizon’s balance sheet.

“Gaining scale is critical to remaining competitive,” Dwight said. He isn’t concerned about fintech companies, many of which he thinks will remain unproven until they weather a downturn. Instead, he says the increased competition is coming from the nation’s biggest banks.

To this end, a recent Horizon investor presentation points to the economies of scale that benefits the bank as it grows larger. Banks with less than $3.5 billion in assets tend to have efficiency ratios that exceed 63%. That dips to 59% for banks with between $3.5 billion and $7.5 billion in assets, and down to 55% for banks between $10 billion and $20 billion.

This is critical. Efficiency impacts all aspects of a bank’s operations, from how much a bank can invest to recruit talent to how much a bank can allocate to technology investments.

The trend in Horizon’s efficiency ratio speaks to the bank’s success at implementing its strategy. As the bank has grown from $2 billion in assets in 2014 up to $5.1 billion today, its efficiency ratio has dropped from 68% down to 59%. At the end of the day, there is no one-size-fits-all strategy for growing a bank and staying competitive. What makes sense in one market won’t make sense in another. The key is to fight to allure of complacency and to continue improving with the best talent, regardless of the exact contours of that process.