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Some banks like it small

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For many banks, getting larger — via mergers or adding customers — is key to offering comprehensive services while keeping operational costs down. But for others, smaller is better.

Independent community banks often tout their ties to local towns and focus on how their staff, loan officers and others are likely to be local. Just as larger institutions have a role to play in the economy, these smaller banks have their own niche.

Still, it’s getting tougher to stay small, as regulatory compliance and other costs keep rising. To cope, an increasing number of community banks are scooping up similar institutions, or they themselves are being bought out as a way to spread those costs over a larger base while striving to maintain a personal touch.

Monroe Savings Bank in Williamstown is in no rush to expand quickly. Established in 1870, the bank today has a main office and a single branch, both in town.

“We want to grow in a manner consistent with our established lending and investment standards,” said Monroe CEO James Genoy Jr. “We won’t dilute our lending standards to meet growth goals, and we’ve worked diligently to accumulate enough capital to weather a possible downturn.”

"Smaller banks that are staying independent have to be very careful about controlling their costs."

Veronica Montagna, McCarter & English

Monroe’s status as a depositor-owned mutual bank helps, he adds.

“Because we’re not a publicly held institution, we can make decisions without the pressure of meeting quarter-to-quarter growth earnings,” Genoy said. “Instead, we can make decisions that have long-term benefits and that reinforce customer loyalty.”

Nevertheless, Veronica Montagna, a Newark-based partner at the law firm McCarter & English who represents banks, says regulatory costs can often force many smaller banks into mergers.

The small-bank model

About half of the members of NJBankers, the Cranford-based industry advocacy organization, “have less than $500 million in assets, and many have 10 to 12 branches or fewer,” said John McWeeney Jr., its CEO.

“Much of the merger activity we see involves smaller community banks combining to scale up so they can meet the costs associated with more stringent regulatory requirements,” McWeeney said.

Smaller banks generally try to operate efficiently, with a lean staff count.

“Often, they’ll work with third-party service providers, and may outsource some core operating and other systems,” McWeeney said. “NJBankers also has associate members who do business with banks, like providing smaller institutions with sophisticated products and services the bank can offer to its own customers. [One] smaller bank contracted with a third-party provider that helps to identify applicants with direct marketing and other activities, and underwrites and services the SBA loans.”

New Jersey’s “generally vibrant economy and educated, skilled workforce” also helps smaller banks to succeed, he added.

But there may be a dark cloud on the horizon: Gov. Phil Murphy has proposed establishing a state-owned bank.

According to Murphy, “a public bank will allow New Jersey to invest in New Jersey.”

State Sens. Nia Gill, D-34th District, and Richard Codey, D-27th District, introduced the State Bank of New Jersey Act in January to get the ball rolling on creating a public bank for the state.

The small-bank advocates at NJBankers conceded they are worried.

“We’re concerned about that,” McWeeney said. “Many New Jersey banks rely on municipal deposits, and if a state-owned bank solicits them it could threaten many other banks, especially smaller institutions.”

“In terms of absolute dollars, bigger banks generally have to shoulder more regulatory costs,” Montagna said. “For example, under a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, banks with total consolidated assets of more than $10 billion are generally required to conduct annual ‘stress tests’ that provide the Federal Deposit Insurance Corp. with information used in bank supervision and to assist the agency in assessing the bank’s risk profile and capital adequacy.

“But proportionately, these big banks have a bigger revenue base compared to community banks,” she noted. “That can absorb the costs. Smaller banks that are staying independent have to be very careful about controlling their costs.”

There’s been a lot of M&A activity among New Jersey banks in recent years, with 14 deals completed from 2015 to 2016, according to data from the state Department of Banking and Insurance. Another eight were announced in 2017, according to DOBI, and four more in January.

Preston Pinkett III, CEO of City National Bank in Newark — which has two branches in Newark and one in New York City’s Harlem neighborhood — said City National’s mission is to serve minority and underserved communities that historically have been left behind.

“We provide banking services to communities that would not otherwise have it,” Pinkett said. “We were established to help poor customers make ends meet and to help them to build wealth.”

It’s been a struggle to meet rising costs, but the bank’s tight rein on expenses helps.

“Size and scale do matter,” he said. “But if your only objective is a higher financial return, there are easier ways to get it.”

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