Peapack-Gladstone Financial in Bedminster, N.J., plans to use fresh capital to boost fee income by buying wealth management companies.
The effort should help it bring in more fee revenue that is less dependent on mortgages and other lines sensitive to fluctuations in interest rates. A number of banks have announced wealth management acquisitions in recent months for similar reasons.
Wealth management is already a big business for the $6 billion-asset company, which had $7.6 billion of assets under management on Sept. 30. Peapack, which has bought five New Jersey firms in the last six years and recently issued $100 million in subordinated debt, wants to expand in New York and enter Florida.
A move south would keep Peapack in touch with the growing number of affluent New York and New Jersey residents flocking to Florida, said John Babcock, president of Peapack Private, the company’s wealth management unit. “We have had more than a few conversations with firms down in Florida,” Babcock said.
“People are moving to lower-tax states,” he said. “We need to be there to catch them. It’s kind of the old ‘follow the money’ mantra. … We want to get a foothold [in Florida] then use that as a way to kind of build and grow.”
Several M&A deals in this sector have been announced since the beginning of the year.
The $97 billion-asset SVB Financial Group
Essex Financial, parent company of the $470 million-asset Essex Savings Bank in Connecticut, formed a strategic partnership on Jan. 20 with Mark Sheptoff Financial Planning in Glastonbury, Conn., to provide wealth management and financial planning services to more clients.
Citizens Financial Group in Providence, R.I., is also looking for potential acqusitions.
"We're still active in [M&A] conversations in the wealth space," Bruce Van Saun, the $183 billion-asset company's CEO, said during a recent conference call to discuss quarterly earnings. "We've gone a long way towards cementing that capability ... but there could be selective opportunities for us to augment our industry vertical approach with some boutique acquisitions."
While mortgage lending has propped up fee income at banks of all sizes in recent quarters, wealth management provides a more consistent revenue stream, industry experts said.
Wealth management relationships are sticky and investors often put a premium on banks that are building those businesses, said Chris Marinac, an analyst at Janney Montgomery Scott.
"People aren’t going to do transactions with their wealth,” Marinac said.
Income from wealth management “is not tied to interest rates, so it’s less volatile,” said Rita Sahu, an analyst at Moody’s Investors Service. “It creates a more diversified revenue stream.”
The business “will likely be a tailwind for some banks based on market dynamics,” Christopher Wolfe, a managing director at Fitch, said during a recent banking event hosted by KPMG.
Not all banks are bulking up. Others are selling their operations to focus on core banking businesses.
Associated Banc-Corp in Green Bay, Wis.,
At Peapack, the focus on wealth management helped it obtain favorable pricing for the subordinated debt it issued on Dec. 22, said Douglas Kennedy, the company’s president and CEO. Both Moody’s and Kroll Bond Rating Agency gave the notes investment-grade ratings, Moody’s at Baa3 and Kroll at BBB-.
The 3.5% fixed-rate coupon — essentially the interest Peapack will pay — is the lowest for bank-issued subordinated debt in the past six months, according to data compiled by Performance Trust Capital Advisors. The average coupon for all banks over that period was 4.7%.
“We ended up with almost 40 investors, so not only was the rate attractive, it was very widespread in terms of interest and, in the end, we were more than two times oversubscribed,” Kennedy said.
“This was just a great time to go to the market,” Kennedy added. “The deferred loans had gone down substantially, and the fact so many … investors are in this space trying to purchase this kind of debt. All of that led us to believe this was the time we should do it.”
Nearly 140 banks have issued subordinated debt since July 1, according to Performance Trust.
Peapack’s wealth management prowess “is significant,” Sahu said. “It’s definitely unique — especially given Peapack’s size.”
Through the first nine months of 2020, Peapack’s wealth management fee income totaled $30.1 million, roughly a fifth of its $143.2 million in total revenue. At banks with more than $1 billion of assets, wealth management on average makes up 5% of revenue, according to data from the Federal Deposit Insurance Corp.
The company is now looking to boost that revenue even more by following its relocated customers. Florida is now the primary residence of about a tenth of Peapack’s wealth management clients, Babcock said.
At the same time, Peapack wants to do more business in the New York metropolitan area. While it’s talking with several firms, there’s no telling when a deal may result.
“Those conversations take years,” Kennedy said.
Peapack wants to buy firms with $300 million to $1 billion of assets under management, which would be in line with its recent deals. Lasses Wherley in New Providence, N.J., which Peapack bought in June 2018, had $500 million of assets under management. Quadrant Capital Management in Fairfield, N.J., which the company bought in late 2017, added $400 million of assets under management.
“We’re not trying to bet the ranch on some huge acquisition unless it was just up-and-down perfect,” Babcock said.
In addition to expanding in wealth management, Peapack is considering using some of the new capital to retire more expensive debt. It’s also weighing a round of buybacks.
“If you just use a back-of-the-envelope sort of calculation, it would be $20 million to $25 million [of buybacks], if that were to happen,” Kennedy said.
