Cultivating Organic Growth

By Christopher D. Maher

Bank M&A activity started out strong in 2021. Nearly 70 bank mergers with a total value of $29.12 billion have been announced year-to-date, according to S&P Global Market Intelligence—the second highest volume in the past six years. However, those who focus only on M&A announcements are missing an important point: delivering organic growth by strategically entering new geographic markets can be just as beneficial, and sometimes even more beneficial, to a bank and its shareholders as an acquisition.

At OceanFirst, we have seen this phenomenon first-hand. Having successfully completed seven bank acquisitions since 2015, we also have added approximately $1.5 billion in assets via organic expansion into new markets, including New York City, Philadelphia and, most recently, Baltimore. I think most banking leaders would agree that mergers can be quickly accretive but tend to be expensive upfront, while organic expansion offers a higher ROI but takes time to generate meaningful profitable growth.

Build and buy

The lesson is that rather than “build versus buy,” the most powerful strategy is a combination of “build and buy.” To that end, we have found there are a number of strategic elements to a successful program of organic expansion into new geographic markets.

The first step is to take an objective look at your bank’s business in its existing markets, to understand what makes your organization competitive and successful. The qualities that enable you to do well in your current market should determine how you select and approach new markets. For example, our bank is based in New Jersey and includes the metropolitan New York-Philadelphia region. Based on this geographic footprint, we compete with some of the largest financial institutions in the country by providing a full range of banking services, coupled with the responsiveness of a community bank. It is logical, then, for us to seek growth opportunities in similar markets where the share held by money center banks affords opportunity to smaller competitors.

On the other hand, even as you consider entering a new market whose dynamics may appear similar to your original footprint, remember that each market has its distinct local flavor. The economic drivers, types of businesses and competitive landscapes in one market or region may be quite different from what your bank is familiar with—and the nuances can be subtle and hard to detect. We have found it helpful to recruit a deeply experienced and locally known regional president for each new market, ensuring that we stay focused on needs of that community. For the same reason, we believe decisions such as credit approvals should be made in-market whenever possible.

It is also important to choose a new market that provides sufficient opportunity for your bank to grow a meaningful business. One way to determine this is to examine the performance of the local banks, including factors such as asset growth, profitability and credit quality. Look at the overall local economy, in terms of wages, unemployment levels, real estate prices and other factors. Avoid markets with a large number of marginal competitors, a heavy concentration in a few industries or unsettled economic conditions (such as a major employer closing facilities). If the area is not healthy enough for existing community banks to do well, it probably can’t support another new bank entrant.

When entering the new market, resist trying to do everything at once. Instead, lead from a position of strength. If commercial lending is your bank’s strongest offering, kick off your presence with that and add further services and solutions as you become better established. Similarly, a bank known for consumer services would be well advised to emphasize that aspect of its operations.

Talent backed by organizational commitment

Staffing your new market with well-respected and experienced bankers is essential. You will want to hire bankers who have well-established relationships not only with customers but also with “centers of influence” like accountants, law firms and title companies. Pay extra attention to the first few transactions you complete with your new team. These initial client interactions in a new market are mission-critical; they will set the tone for your future success or lack of it. Recruiting the first few hires in a new market is always a challenge. You will want to find bankers who are entrepreneurial but who have also shown a long-term interest in serving their clients and markets. It may take longer than expected. The right talent will be crucial to success. If you can’t find the right people, don’t go into the market.

You also must make the organizational commitment to support the talent who will be spearheading your entry into the new market. It will be important to have systems and processes that can scale-up to support the team in a new market, especially if it is not adjacent to your current area. Third-party resources, such as technology providers and appraisers, must also be lined up and ready to support the new region.

Remember that extending your physical presence into a new market also means extending your bank’s brand. Plan to make a commitment to local organizations like the Chamber of Commerce and community organizations and become familiar with local media. While building the franchise is primarily the responsibility of your new in-market team, senior executives from the bank, including the CEO, should be highly visible, meeting prospects and local influencers. Be prepared to demonstrate a personal commitment in the new market by regularly visiting with your new team and getting first-hand feedback.

As I noted earlier, the most successful strategy is likely to be a combination of build and buy. Entering a new market organically provides a way to size up the opportunities there and can be supplemented later with an add-on merger. Alternately, an acquisition can allow a bank to quickly achieve scale in a new market, with subsequent investments in additional talent and capabilities to build growth organically on the acquired base. In either case, a thoughtful, focused and disciplined approach to entering a new geographic market can be a vital part of the bank’s formula for success.

Christopher D. Maher is chairman and CEO of OceanFirst Financial Corp. Based in Toms River, New Jersey, OceanFirst has nearly $12 billion in assets.