The Growth and Consolidation of Banking

Over the past 15 years, consolidation via mergers and acquisitions has been the name of the game within the Garden State’s banking industry. While cost remains one of the primary factors behind bank consolidations (as of March 2022 there were 58 headquartered banks in New Jersey, compared to 111 banks 15 years ago), industry executives report that the New Jersey market is thriving. Though the number of banks in the state has steadily declined, the impacts of these mergers have been significant for the banks as well as both consumer and commercial clients.

“The benefit of a merger is primarily to consolidate and reduce operating expenses. As the industry continues to consolidate, those banks that remain have a better opportunity to grow market share as many customers do not like banking with larger banks,” says James A. Hughes, Unity Bank’s president and CEO. “The negative is that there are fewer choices for consumers.”

With 18 branches in New Jersey and two in Pennsylvania, Unity Bank is one organization that continues to grow its network. It opened its 21st branch in Morris County this summer with a location in Lake Hiawatha. According to Hughes, there are several factors driving the increase in bank mergers in New Jersey, but the increased regulatory burden is the primary factor.

“[Other factors include] competition from non-bank financial institutions and the increased cost of doing business in New Jersey,” he adds, pointing out that the state has the highest tax costs in the nation.

First Commerce Bank President and CEO Donald Mindiak notes that for small community banks, the state’s regulatory compliance costs remain a significant challenge. First Commerce Bank is a full-service community bank headquartered in Lakewood, with 10 branches spread throughout North and South Jersey.

“The burden of regulatory compliance – and the cost – is always increasing,” he says. “We have a saying that regulatory compliance is never going to be less than it is today, and it’s always going to be more than it is tomorrow.”

However, he notes that lack of more diverse avenues of non-interest income are also presenting banks with sizeable challenges, since banks rely on that interest income to make money. “Right now the yield curve is inverted, which ultimately means that earnings are under significant pressure within the industry,” he adds.

The good news is that while there are fewer banks calling New Jersey home, their total amount of assets has significantly increased. Mindiak notes that New Jersey banks had combined total assets of just under $150 billion in March 2018, and in March 2023 that had increased to $196.5 billion despite all of the consolidation.

The largest independent bank headquartered in New Jersey, Valley Bank, has a 95-year history in the Garden State. The organization continues to grow all facets of its business in both the consumer and commercial markets. While Tom Iadanza, Valley Bank president, agrees that rising regulatory costs are behind the uptick in mergers and consolidation, he notes that another significant cost is the need to keep up with technology. “More sizable organizations can afford a greater investment in technology, and that tends to spark conversations about potential mergers and acquisitions,” he says.

And financial institutions know that those offerings are crucial to remaining relevant in today’s tech-driven world. “We are well aware that the days of people going to the bank are largely over. Today, you can sit on the couch and transfer money on your phone,” Mindiak says. However, he notes that sometimes the increase in technology can negatively impact bank branches, as some institutions will opt to close underperforming offices and instead rely on features like remote deposit capture. “That consolidation reduces the number of brick-and-mortar offices, which can impact customers,” he adds.

“As the world becomes more digital, financial transactions are often delivered without personal service. This is why it’s so important for community banks to survive,” Hughes adds. “Without community banks, small businesses wouldn’t get the financial support they need. Small businesses are the employers for our communities.”

Additionally, bank mergers can also lead to both the combination and acceleration of new lines of businesses for their customers. “A lot of this activity often relates to the age and motivation of the CEO or management teams, as well as their desire to invest in the future, in addition to keeping up with growing costs and expanding lines of business,” Iadanza explains.

“Another factor to consider is that if a bank starts getting into financial trouble, the FDIC will often intervene and find them a partner rather than allowing the institution to fail,” Mindiak adds. He notes that the FDIC also imposes a minimum capital requirement in order to open the doors of a new bank, which has made implementing new branches impossible for many organizations.

Regardless of the reasons for consolidation within the banking industry, the good news is that there are an array of benefits for both banks and consumers alike when two organizations decide to merge. According to Iadanza, the primary benefits of mergers boil down to efficiency and accelerated expansion of the business. But there are also benefits for the customers: banks with more resources can invest in technologies and efficiencies that ultimately benefit both consumers and businesses alike.

“Consolidation breeds efficiency – these mergers benefit the shareholders of the combined institutions, and these larger institutions now have increased resources to invest in advanced technologies and offer a broader suite of services for the benefit of their customers,” Mindiak says.

On the other hand, the merging of two businesses, regardless of the industry, can also lead to some challenges, not the least of which are potential impacts to the customer experience and issues related to developing a new culture for the business. “Many people stay at the same bank for years because of the people they deal with, and we don’t want customers to lose that personal connection,” Iadanza says. To combat that issue, Valley Bank retains all customer-facing employees when making acquisitions. “In our experience, managing the culture is key. You don’t want to lose sight of the reasons why you acquired a particular bank in the first place,” he explains. “That’s why we don’t swoop in and start making a ton of changes. … We allow the banks to run their business at the local level and provide support for them to do what they do best.”

Looking ahead, Hughes predicts continued consolidation, with large regional and money center banks having fewer branches and relying more on technology, as community banks continue to offer branch banking with a personal touch. “Despite the cost of doing business in New Jersey, it is an exceptionally good market. The industry will continue to consolidate. However, I do believe the industry will survive,” he concludes. 

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