The Industry Confronts Costs and Competition

Institutions must battle for revenue in a crowded, well-off state as loan margins slideSpotlight – Banking and Finance

Despite a host of threats that include high housing prices, high taxes and concerns of overregulation, New Jersey is still a good place to do business, say bankers from institutions large and small. Still, growing competition means they have to scramble to stay on the top.

This means making things as easy as possible for customers. “Just a few years ago, community banks didn’t offer much in the way of online banking services,” says Frank Sorrentino III, chairman of North Jersey Community Bank in Englewood Cliffs. “But as more banks consolidated, the competition got bigger…Today, most community banks either have high-tech services or are working on them.”

Meanwhile, banks of all sizes feel pressure on their margins—the difference between their cost of funds and the interest they charge on loans—says Paul E. Fitzgerald, CEO of North Jersey Community Bank. In this position banks try to beef up other fee-generating activity, Fitzgerald says.

“We offer a complete relationship with customers, including [business] checking and other accounts,” says Fitzgerald. “At the same time, it’s important not to get greedy, which could alienate customers.”

He sees the state’s business climate as healthy, but says a significant slowdown in the residential real estate market could pose a big challenge for some banks: “Banks that are heavily into adjustable-rate mortgage products and others that offer a lot of stretch may have a lot of exposure to a downturn.”

A real estate meltdown is unlikely in southern New Jersey, says Robert C. Ahrens, president of Gloucester County Federal Savings Bank. Speaking from his Washington Township headquarters, Ahrens says that even though South Jersey real estate has had some hefty increases, property there in general hasn’t experienced the kind of upward spiral seen in the central and northern parts of the state.

“But we’re still getting hit hard by real estate and other taxes,” he says. “That makes it tough for people who are retired or are otherwise on a fixed income. If they start to move out of the state, they may take their deposits and other banking relationships with them.”

Despite these concerns, New Jersey presents a positive business picture, says John Bell, senior vice president and market executive for business banking in New Jersey for Bank of America. “There’s been a move to expansion among our commercial customers,” says Bell, who works out of Glen Rock. “They’re borrowing to buy new equipment and to hire more employees.”

For Raymond G. Hallock, CEO of Fair Lawn-based Columbia Bank, two of the biggest banking issues are an influx of out-of-state banks and unending technological change. “New Jersey is an attractive market, and an increasing number of large banks from other states are coming in or expanding their presence here,” says Hallock, who is chairman of the New Jersey League of Community Bankers. This forces banks like his to compete harder for “their small-business-owner niche.”

He points out that consumers want access to their banks on their own terms. While Internet banking offers that, many also want to be able to interact with live personnel.

“About 10 years ago, many people were predicting that bricks-and-mortar bank branches would disappear, but instead they’re expanding, and we’re increasing our operating hours,” says Hallock.

Like many other bankers, he’s concerned about the possibility of a pullback in the economy. “All of us were better insulated when the spread [between a bank’s borrowing costs and its lending yields] was bigger,” he says. “But we’re coping with the situation by trying to increase fee income while decreasing our expenses. Most banks are also more cautious about their underwriting activities, looking for a more conservative loan-to-value ratio, for example.”

While Hallock says he’s generally upbeat about the state’s condition, he admits to one major concern. “New Jersey has got to get its finances in order,” he says. “We’ve got a multibillion-dollar budget crisis; we’ve got inefficiencies from too many layers of government and too much in the way of [state] pension costs. Together these are a lot more terrifying than any Federal Reserve interest-rate increase.”

E-mail to mdaks@njbiz.com