Squeezed between rising costs and stakeholder demand for better financial results, more banks are turning to a “bigger is better” model, looking to mergers and acquisitions to help drive efficiency. The numbers tell the story: In 2008, the advocacy organization for the New Jersey banking industry, the New Jersey Bankers Association (NJBankers), had 125 member banks. By 2024, though, that number had dropped to 65. With fewer but larger financial institutions becoming the standard, is there still space for smaller banks?
“The question is how to cover increasing costs,” according to NJBankers President and CEO Michael Affuso. “For some institutions, it’s with scale. You get bigger so you can spread out regulatory, cybersecurity and other costs over a wider base. It’s one way of creating value for shareholders and customers.”
But he wonders if the trend may be losing steam. “The finalization of mergers is taking longer, and current economic conditions could mean that fewer new deals will be announced,” he added. “That’s because banking valuations and stock prices are down, so sellers may not want to close deals at depressed prices. We’re already seeing some previously announced M&As, like the Provident-Lakeland one, taking longer to close.”
That doesn’t mean the bottom will fall out for bank M&A, however. “As interest rates drop, artificially depressed stock values should bounce back to more-reasonable valuations,” he said. “At that point you could see a pickup in banking M&A. I don’t think that will happen in the first half of this year, though. You may see it in the final quarter of 2024, or sometime in the first half of 2025.”
The trend may currently favor consolidation, but there’s still plenty of room for smaller, independent banks, Affuso added. “Banks of all sizes are needed,” he said. “While larger ones offer certain conveniences, smaller ones can also be more segment focused. In New Jersey, for example, we’ve got banks that specialize in areas like agriculture, fishing and the hotel-amusement industries. The most important issue is providing service to customers, so there’s always a demand for niche-focused institutions that have carved out a specialty by industry or community.”
Institutions like Vineland-based Century Savings Bank – which traces its roots back to 1865 – illustrate that concept. “We’ve stayed independent by sticking to what we know,” said Century President and CEO Dave Hanrahan. “When you boil it down, we’re really good at two things — giving depositors a safe and friendly place to keep their money, and providing local borrowers direct access to smart, reliable, responsive bankers. Done right, those two things make for a really good, sustainable business.”
With about $600 million in assets, “I believe the size of Century is one of its biggest strengths,” he added. “We’re small enough to be nimble, to be focused, and to have a pretty simple operation. But we’re still big enough to handle almost any banking need our local customers have.”
Many larger banks are publicly owned, but Century Savings Bank remains a mutual institution, which is basically owned by its customers. “I’m a pretty recent ‘mutual convert’, having spent the first 30-plus years of my career at different stockholder-owned banks before joining Century,” Hanrahan said. “I really like the long-term perspective of a mutually owned institution. It allows us to concentrate on serving our customers, community and employees without the conflict of maximizing stockholder value.”
He plans on maintaining that focus. “Our board and management team are all-in on keeping Century Savings Bank a dependable, responsive, friendly, locally controlled mutual, as it has been since 1865,” Hanrahan said. “There’s this oft-repeated myth – probably invented by investment bankers – that a bank has to be $1 billion in size to be relevant. But there are loads of really good, strong, small community banks across the U.S. – including Century – that prove that myth wrong.”
Other smaller banks are also optimistic. “Magyar Bank was founded back in 1922 by a group of Hungarian businessmen with the mission of helping the local Hungarian community with the banking services they needed,” said Magyar President and CEO John Fitzgerald. “They were committed to not just providing families and businesses with banking services, but were also deeply involved in the community, supporting local organizations and assisting with the implementation of their programs. Magyar has continued this mission throughout its history, remaining actively involved in the community providing financial support and employees volunteering their time with the goal of making our community a better place to live and work. As a result of these efforts, Magyar has built strong relationships with the community, and developed a loyal customer base that continues to grow along with the bank.”
He listed some challenges for smaller institutions, such as the fact that banking is a heavily regulated industry, “and each year the list of regulations that govern financial institutions grows,” Fitzgerald explained. “Increased regulations increase the cost of doing business. But Magyar has an experienced and motivated staff that continuously adjust to the new guidelines and find ways to grow the business, while at the same time making sure Magyar stays true to its mission of helping the community.”
The latest on NJ’s public bank:
A board tasked with overseeing the development of the long-anticipated New Jersey public bank submitted its final recommendations to Gov. Phil Murphy in February. Click here to read what it included.
Still, successful banks must be flexible. Magyar, for example, shifted from a mutually owned structure to public ownership in 2021. “The decision to become a publicly traded company really came down to raising capital so the bank could grow,” Fitzgerald said. “The additional capital raised through our public offerings has allowed the bank to expand its customer base and service larger customers, leading to new opportunities and new relationships. While there are certainly a number of challenges associated with being a publicly traded company, such as the additional reporting requirements and the costs associated with meeting these requirements, the additional capital has allowed Magyar to expand its customer base while at the same time make sure we are able to continue serving our community.”
But he also has a healthy respect for tradition. “Magyar Bank is a community bank, and that not only describes our business, but it is also our business strategy,” Fitzgerald said. “The bank has grown over the years by being an active member of the community, establishing relationships which have not only helped make a difference in the communities we serve, but has also resulted in acquiring new customers and growing the business. As we move forward, we look to continue our community-first strategy which has grown the bank to just under $1 billion in assets.”
Fitzgerald looks forward to maintaining Magyar’s momentum. “I am very excited about the future of Magyar Bank,” he said. “Throughout our history, we have weathered numerous economic cycles, including some challenging times like the Great Depression, the Great Recession, and the COVID-19 pandemic. In each case, Magyar remained true to its roots and focused on making sure we helped our community, and we emerged as a stronger institution. This is a testament to the hard working staff and the relationships we have built over our long history, and I look forward to making an even bigger impact on the communities we serve.”