Why North Jersey banks are eyeing Philadelphia

Sandler O’Neill & Partners spent Wednesday visiting with 11 North Jersey banks ranging from $1.2 billion to $32 billion in total assets. One of the big takeaways: merger and acquisition prospects appear bright and the geographic target is the Philadelphia region. 

At least five of those banks have grown or are looking to grow in Southeastern Pennsylvania — Bank of Princeton, First Bank, Investors Bancorp, OceanFirst Financial Corp. and Provident Financial Services. Click on the gallery above for more details about what could be motivating each of those banks. 

In a report to investors, Sandler O’Neill analysts Mark Fitzgibbon, Frank Schiraldi and Nicholas Cucharale noted that deposit competition in North Jersey remains competitive — moreso than in Philadelphia 

“All of the banks we met with continued to bemoan a difficult environment for deposit gathering,” the report said. “As a consequence of the elevated capital levels of the banks in the state, high loan-to-deposit ratios and several institutions pursuing growth strategies, funding remains a principal challenge.”

As of March 31, Sandler said the median loan-to-deposit ratio among publicly traded New Jersey banks measured 102% (fourth-highest of any U.S. state) and the total cost of deposits was 1.27% (second-highest). 

In addition to that funding headwind, North Jersey banks are dealing with mounting pressures from a flatter yield curve and the belief the economy is nearing the end of an upward cycle.

“We sensed a more upbeat tone on M&A, particularly for targets of $1 billion in assets and below,” Sandler O’Neill wrote to investors. “Six of the 11 banks we met with have closed or announced a whole bank transaction since the beginning of 2018 in addition to another announcing a pending branch deal. There remains a clear preference for targets with excess liquidity and low-cost, core deposit bases.”

In an interview, Schiraldi said these banks are tempted by Philadelphia because it is essentially a contiguous market that has endured some dislocation of talent and customers from the recent BB&T Corp. acquisitions of National Penn Bancshares and Susquehanna Bancshares and the recent WSFS-Beneficial deal. 

“South Jersey just doesn’t have a lot of density or commercial activity so they are not really looking there,” Schiraldi said. “But [Southeastern] Pennsylvania does and it’s not as competitive for deposits as North Jersey.”

Performance metrics for Pennsylvania banks have been significantly better than those of their New Jersey counterparts in the post-recession era. Part of that has to do with the economic struggles of Atlantic City, a foreclosure crisis and Hurricane Sandy. But there is also the issue of taxes. 

In its state budget passed last July, New Jersey lawmakers increased corporate income taxes on businesses earning more than $1 million from 9% to 11.5% in 2018 and 2019 and then 10.5% in 2020 and 2021. Pennsylvania has a flat 9.9% corporate income tax rate.