Why bank M&A is flourishing in the Garden State
New Jersey was a hotbed of merger activity this summer.
Five banks in the Garden State agreed to be sold between June and August, including Stewardship Financial, Two River Bancorp and Bancorp of New Jersey. Valley National Bancorp’s pending $744 million purchase of Oritani Financial, announced in late June, is this year’s seventh-biggest bank deal.
The deals accounted for 7% of all bank mergers announced over the summer. The only states with more deals over that time were Illinois, with nine mergers, and Texas, which had eight, based on data compiled by S&P Global Market Intelligence.
The spike in activity mirrors an increase in overall consolidation, as intense competition for deposits and a need for scale spurred more banks to seek out buyers. Acquirers have a desire for more talent and market expansion, along with a heightened need for cost savings.
Despite disruption caused by a volatile stock market, bankers expect more M&A in New Jersey as 2019 wears on.
“The cost of running a financial institution, as a percentage of revenue, is only continuing to go up … so size does matter,” said Frank Sorrentino, chairman and CEO of ConnectOne Bancorp in Englewood Cliffs, N.J., which is buying Bancorp of New Jersey.
“We have to always be focused on improving efficiency,” Sorrentino said, adding that smaller banks are realizing the need to invest in technology, security and advanced products to compete with big banks. Acquisitions provide “important economies of scale.”
For the $6.1 billion-asset ConnectOne, buying the $925 million-asset Bancorp of New Jersey provides an abundance of expense-cutting opportunities. ConnectOne expects to wring out about 60% of the seller’s annual noninterest expenses through moves such as closing redundant branches.
Nearly 130 banks operate in New Jersey, according to data from the Federal Deposit Insurance Corp. Of those, 72 are headquartered in the state, based on data compiled by S&P Global.
“We are overbanked here,” Sorrentino said. “There are a lot of small banks under pressure to show improved profits.”
The $4.1 billion-asset Oritani certainly faced pressure to improve its bottom line. A recent regulatory filing tied to Oritani’s pending sale to Valley cited fierce market competition, burdensome regulatory costs and the flattening yield curve as reasons the Township of Washington company sought a buyer.
The filing also revealed intense interest from potential buyers.
Oritani had in-depth discussions with two bigger in-state banks, and another based outside of New Jersey, before striking its deal with Valley.
For its part, Valley viewed Oritani as a catalyst for continued growth.
During a conference call to discuss the deal, Ira Robbins, Valley’s president and CEO, said the acquisition would provide the deposits needed to make more loans, along with capital his company could invest in high-growth markets.
Valley has been booking loans at a double-digit annualized pace over the past five quarters. Deposit growth, while strong, has trailed modestly amid intense competition.
While commercial clients are expressing some concern about global economic sluggishness and uncertainty about the trade war with China, the overall economy remains solid, backed by strong consumer confidence and spending, said Neil Saunders, an economic analyst at GlobalData.
“The near-term outlook, at least, is favorable,” Saunders added.
The $8 billion-asset OceanFirst Financial in Toms River, N.J., sees plenty of opportunities for ongoing growth, including M&A. The company aims to expand around New Jersey’s Monmouth County, where it is buying the $1.2 billion-asset Two River.
OceanFirst also has a pending deal for Country Bank Holding in New York.
“We’ll double our presence [in Monmouth County] and pick up a proven team of commercial lenders” with the Two River deal, said Chris Maher, OceanFirst’s chairman, president and CEO. "There is a lot of talent there.”
OceanFirst plans to pair low-cost deposits with more commercial loans.
Maher said he expects M&A in New Jersey to continue at a steady clip, as declining interest rates pressure loan yields and curb the benefits of organic growth.
“This is a difficult rate environment,” Maher said, adding that buyers are hunting for scale and ways to spread out the cost of tech upgrades. “If you want to show progress improving profitability, the opportunity through M&A is available now, and it may be more attractive … than it was a couple years ago.”
Investors Bancorp in Short Hills, N.J., which has also been navigating a rate environment that is pressuring loan yields, recently returned to M&A with an agreement to buy the $563 million-asset Golden Coast Bancorp in Islandia, N.Y.
The $27 billion-asset Investors views M&A as an efficient way to add deposits and loans, and to expand into new markets, said Kevin Cummings, the company’s chairman and CEO. He said consolidation will likely continue among New Jersey's banks, though some institutions will look for deals in other states.
Gold Coast will add $460 million in loans and $480 million in deposits when the deal closes early next year.
“We have a need to build up loans and we need deposits to fund them, and [M&A] is going to help us,” Cummings said. “You will see more deals.”