Executive Summary

New Jersey’s banking market is dominated by money center and super-regional institutions while community banks largely compete in niche segments. Several fairly recently-converted institutions with much capital are based in New Jersey. As discussed in more detail herein, South and North Jersey are distinctive markets with significantly different economic, cultural, and demographic attributes.

This report highlights 23 publicly-traded banks in New Jersey with assets between $500 million and $10.0 billion.

We believe banks in this size range are large enough to operate efficiently and small enough to deliver personalized services. These stocks typically trade “under the radar screen” – they are not widely followed by brokerages or institutional investors for several reasons, including fairly low market caps and little trading volume.

The highlighted banks generally have solid balance sheets with strong asset quality and acceptable capital ratios. Spread income – as is the case with community banks nationally – represents the major source of revenue. Investment and funding portfolios, therefore, require more active management than in recent years due largely to the flat/inverted yield curve.

Highlights:

  • New Jersey has 64 regulated depository institutions, of which 33 are publicly-traded banks and thrifts. Only 12 companies have assets more than $2 billion. The top five banking institutions in New Jersey combine for 55% of the state’s deposit market share.
  • As of September 30, 2019, the spread between 2 and 5-year Treasury notes was negative (8) basis points vs. 13 (positive) basis points a year-ago. We generally regard 2 and 5-year Treasuries as proxies for funding costs and investment yields, respectively.
  • Despite having one of the higher median household incomes among all states, New Jersey’s economic recovery has lagged that of the nation over the past decade. Progressive economic policies include hefty state spending programs and state income tax and personal property tax rates that rank among the highest in the nation.

Conclusion

The single largest longer-term challenge that face banks will be to attract and retain core deposits, particularly if short-term interest rates are volatile. Along with pricing stress from aggressive community banks, pressure could come from credit unions, money center, regional, and internet banks. The competitive environment appears unlikely to ease in the near-future, but rather, could become even tougher as Millennials and ambitious technology-driven financial services companies redesign the community banking model.

Our sense is that the New Jersey economy remains healthy, but its banks (as is the case with banks everywhere) face macro challenges that include the flat/inverted yield curve and funding asset growth with core deposits. Asset quality remained strong through the second quarter of 2019, but we question if loan pricing reflects an adequate risk premium should the economy sour unexpectedly. Credit costs and net charge-offs should remain low for the foreseeable future, but the implementation of the Current Expected Credit Loss “CECL” accounting standard regarding loan loss reserves is a wildcard.

For more information, please visit pnc.com/fig or contact PNC FIG Advisory by calling 1-610-351-1633

FOR AN IN-DEPTH LOOK
Flying Under the Radar: New Jersey