| Valley National Bancorp (VLY) is a conservative bank | | | | with little difficulty. The company's asset quality ratios |
| with a strong position in northern New Jersey and a | | | | and loan to value ratios both indicate Valley has a |
| presence in Manhattan. The bank, founded in 1927, | | | | more conservative approach to lending than many of |
| has about $12 billion in assets. | | | | its peers. |
| Valley has consistently earned extraordinary returns | | | | Undoubtedly, the local economy is helpful in this |
| on assets and equity. Over the last twenty years, | | | | regard. Valley does not need to make questionable |
| Valley has averaged a 1.74% return on assets and a | | | | loans, because there is an abundance of opportunity |
| 21.12% return on equity. | | | | in the local area. It is possible for the bank to remain |
| Valley's worst two-year performance occurred in | | | | fairly selective without forfeiting growth entirely. For |
| 1990 and 1991. During that period, Valley's return on | | | | instance, despite having $12 billion in assets, Valley |
| equity dropped as low as 14.54% and its ROA | | | | only has about a 6% market share in northern New |
| dropped as low as 1.29%. Even in Valley's worst year | | | | Jersey. |
| (1991), the company still managed to roughly match | | | | Management |
| the average long-term performance of most of its | | | | Banking, like insurance, is a business where a |
| peers. In other words, Valley's worst year was a | | | | particularly good or particularly poor management can |
| close to typical year for many other banks. | | | | greatly affect long-term results. The current |
| It was at this low-point in 1991 that the board of | | | | Chairman, President, and CEO, Gerald Lipkin, has |
| directors decided not to increase the cash dividend. | | | | served for just over thirty years now. His record is |
| That was the only year in the last 37 that Valley did | | | | unblemished. |
| not increase its dividend. | | | | Of course, the real responsibility for avoiding |
| The company has 79 consecutive years of profitable | | | | mistakes lies with others in the organization. There |
| operations. That's over 300 quarters (Valley has yet | | | | are few businesses where individual employees can |
| to post a quarterly loss). More importantly, Valley has | | | | do as much harm as they can within a bank. Valley's |
| a record of earning great returns on both assets and | | | | past record and the level of experience of its top |
| equity over long periods of time. So, what's the | | | | managers suggests investors should encounter very |
| company's secret? | | | | few unpleasant surprises resulting from human error. |
| Location | | | | Mr. Lipkin made his management philosophy quite |
| Northern New Jersey is about the best place in the | | | | clear with his concluding remarks in the |
| world to situate a bank. This isn't hyperbole; if there's | | | | aforementioned 2001 interview with The Wall Street |
| a better location, I've yet to hear of it. As you | | | | Transcript: |
| know, American banks are unusually profitable. The | | | | "We never bet the ranch - we never put the bank in |
| market is large and highly fragmented. So, naturally | | | | harms way on any single issue that could really harm |
| the best place to situate a bank would be in the | | | | it. Lending money is a risk taking business. So, |
| United States. But, why north Jersey in particular? | | | | obviously we at times have problems, situations with |
| In a September 20th, 2001 interview with The Wall | | | | individual loans, but we try to avoid concentrations |
| Street Transcript, Valley's chairman, Gerald Lipkin, | | | | that could create major problems." |
| explained why northern New Jersey is such an | | | | Valuation |
| attractive market: | | | | Valley National Bancorp is a solid, well-run bank |
| "Northern New Jersey is the single most densely | | | | operating in a geographic area with excellent |
| populated area on earth. There are more people per | | | | economics. The company's physical footprint and its |
| square mile in northern New Jersey than there are in | | | | existing relationships give it a narrow moat in a highly |
| India, China, Japan or anyplace else. We have the | | | | profitable (and increasingly competitive) region. |
| highest median family income in the United States in | | | | Unfortunately, the company is trading at more than |
| that area. So, we serve a very densely populated | | | | three times book. Three times book is a lot to pay |
| and affluent area, which is not dominated by any | | | | for any bank. Valley's future growth will likely be |
| single industry." | | | | somewhat restrained by the company's conservative |
| Focus | | | | approach. Therefore, dividends are going to make up |
| Valley maintains a narrow focus both in terms of | | | | a significant portion of an investor's total returns. |
| geography and services. The company's offices are | | | | Conclusion |
| kept within one hour of the bank's headquarters in | | | | Valley is a good bank. It has a real moat, albeit a |
| Wayne, NJ. In the same interview, Mr. Lipkin | | | | narrow one. Competition is increasing within Valley's |
| explained why this geographic concentration is | | | | territory. However, the company has been able to |
| important: "We like to make it very convenient for | | | | compete successfully with new entrants (who tend |
| our client base to meet with senior management as | | | | to take on far less profitable business). |
| well as the other members of our staff." | | | | The stock isn't cheap today, but there is one wrinkle |
| Valley focuses on relationship banking. The company | | | | worth keeping in mind. Valley is more dependent |
| has residency requirements for its directors. The | | | | upon interest rate spreads than most banks. If the |
| majority of directors are to live within 100 miles of | | | | yield curve was to become significantly steeper, |
| the corporate headquarters. Furthermore, each board | | | | Valley would reap outsized rewards. |
| member is required to use Valley for both business | | | | The current dividend yield on a share of Valley |
| and personal accounts. Theoretically, these two | | | | National Bancorp is a little less than 3.5%. Considering |
| requirements ensure board members are familiar with | | | | the company's limited growth prospects, this is an |
| the bank's services and are best able to understand | | | | unattractive yield. If, during a period of general |
| the needs of local businesses. | | | | uncertainty within the banking industry, shares of |
| Discipline | | | | VLY were to trade closer to two times book, |
| Valley has a history of highly disciplined lending. | | | | investors would have an opportunity to make a |
| Charge-offs are immaterial. Current reserves are | | | | long-term commitment in a quality bank. |
| adequate to cover many years of future charge-offs | | | | |