An Analysis of Valley Bank

An Analysis of Valley Bank

By Geoffrey Gannon

Valley National Bancorp (VLY) is a conservative bank with a strong position in northern New Jersey and a presence in Manhattan. The bank, founded in 1927, has about $12 billion in assets.

Valley has consistently earned extraordinary returns on assets and equity. Over the last twenty years, Valley has averaged a 1.74% return on assets and a 21.12% return on equity.

Valley’s worst two-year performance occurred in 1990 and 1991. During that period, Valley’s return on equity dropped as low as 14.54% and its ROA dropped as low as 1.29%.

The company has 79 consecutive years of profitable operations. More importantly, Valley has a record of earning great returns on both assets and equity over long periods of time. So, what’s the company’s secret?

Location

Northern New Jersey is about the best place in the world to situate a bank. As you know, American banks are unusually profitable. In a September 20th, 2001 interview with The Wall Street Transcript, Valley’s chairman, Gerald Lipkin, explained why northern New Jersey is such an attractive market:

Focus

Valley maintains a narrow focus both in terms of geography and services. The company’s offices are kept within one hour of the bank’s headquarters in Wayne, NJ. Valley focuses on relationship banking. The company has residency requirements for its directors. Furthermore, each board member is required to use Valley for both business and personal accounts.

Discipline

Valley has a history of highly disciplined lending. Charge-offs are immaterial. The company’s asset quality ratios and loan to value ratios both indicate Valley has a more conservative approach to lending than many of its peers. For instance, despite having $12 billion in assets, Valley only has about a 6% market share in northern New Jersey.

Management

Banking, like insurance, is a business where a particularly good or particularly poor management can greatly affect long-term results. Valley’s past record and the level of experience of its top managers suggests investors should encounter very few unpleasant surprises resulting from human error. We never bet the ranch – we never put the bank in harms way on any single issue that could really harm it. Lending money is a risk taking business.

Valuation

Valley National Bancorp is a solid, well-run bank operating in a geographic area with excellent economics. Unfortunately, the company is trading at more than three times book. Three times book is a lot to pay for any bank. Valley’s future growth will likely be somewhat restrained by the company’s conservative approach.

Conclusion

Valley is a good bank. Competition is increasing within Valley’s territory. Valley is more dependent upon interest rate spreads than most banks. If the yield curve were to become significantly steeper, Valley would reap outsized rewards.

The current dividend yield on a share of Valley National Bancorp is a little less than 3.5%. If, during a period of general uncertainty within the banking industry, shares of VLY were to trade closer to two times book, investors would have an opportunity to make a long-term commitment in a quality bank.