Valley National Bancorp's plan for improving its lackluster earnings includes adding a dozen branches this year and funding riskier automobile, residential mortgage, and home equity loans and selling them on the secondary market.
But analysts said they still anticipate mostly stagnant results, because of the intensely competitive markets in which the Wayne, N.J., company operates, and at least one wondered if a sale would be the best course of action.
The $12.4 billion-asset Valley reported last week that fourth-quarter earnings fell 14% from a year earlier, to $38.1 million. Earnings per share dropped 13%, to 33 cents.
For the full year, earnings were virtually flat, at $163.7 million, or $1.40 a share.
Gerald H. Lipkin, Valley's chairman, president, and chief executive officer, did not return phone calls from American Banker, but in a conference call with analysts Thursday he put an upbeat spin on his company's performance and outlined its plan for propping up earnings.
Valley, known for its conservative credit culture, rejected more than 48,000 auto loan applications last year, mainly because of credit quality, Mr. Lipkin said.
But he said that the below-prime market provides a "noninterest income opportunity," and that Valley is in the final stages of introducing a program to approve riskier borrowers for auto loans, residential mortgages, and home equity loans. Valley plans to sell the loans but retain the servicing rights.
"Many of these credits are known as 'zero prime' and represent a category for which investors appear to have a strong appetite," Mr. Lipkin said.
Valley also plans to boost its income by offering a low-interest credit card to its auto loan and mortgage customers, he said.
Mr. Lipkin said that he expects the new initiatives to be accretive to earnings this year, though he did not provide estimates.
Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets, said that he was surprised to hear about the new loan strategy, but he views it favorably. However, he said that he does not expect it to have much of an effect on earnings this year, because ramping up such a program would take time.
"I thought that was interesting, because that was so out of character for Gerry Lipkin to pursue that type of business. However, it's also a sign of the times," Mr. Cassidy said. "So much of the business today is not the pristine business he likes. He recognizes that if he wants to grow, he'll need to go into lower-quality and higher-risk lending."
There is some risk involved in how Valley manages the pipeline of loans, he said. "Does Valley have to sit on them for a week or a month?"
Valley attributed the drop in its fourth-quarter earnings partly to income tax expenses. It paid $13.1 million of taxes last quarter, at an effective rate of 25.6%, compared with $11.1 million a year earlier, at an effective rate of 20%. It said the difference was caused by a reassessment of required tax accruals in the fourth quarter of 2005.
Fourth-quarter net chargeoffs more than doubled from a year earlier, to $3.9 million, mainly because the company wrote off three commercial loans totaling $1.8 million. That exceeded the loan-loss provision of $3.2 million.
Mr. Lipkin shrugged off any concern about the chargeoffs. "As a percentage of our total loan portfolio, it's nil," he said. "The forward indicators look favorable. At this point, we don't see any significant deterioration."
Valley also posted a 4.4% drop in fourth-quarter net interest income, to $98 million, as its net interest margin fell 13 basis points, to 3.42%. But analysts said the net interest margin was a positive, because it held up well from the third quarter, getting shaved by only 2 basis points.
The company blamed the decline on competition for deposits in its markets, which are among the most heavily banked in the country. Valley has 168 branches in central and northern New Jersey and New York City.
Valley added nine branches last year, including three in Manhattan, and is planning to add 12 more this year though it cautioned that the additional operating costs will raise noninterest expenses in the near term.
On Jan. 3 it opened the first of at least three branches planned for Brooklyn, and it intends to expand into Queens and add four branches in Middlesex County, N.J.
The fourth-quarter results included two one-time items: a $3.8 million gain from the sale of a Manhattan office building and a $2.3 million loss from investment securities.
Valley had intended to open a branch in the building after signing a purchase agreement on it in 2004 and closing the deal in November. But Mr. Lipkin said his company received an offer that was too good to pass up. "We believe it would have taken years to produce a similar profit from continuing to pursue a new branch at that location."
The windfall more than offset the loss from $67.5 million of investment securities that were called for redemption early.
Anthony R. Davis, an analyst at BankAtlantic Bancorp Inc.'s Ryan Beck & Co. Inc., pondered the prospects of Valley selling itself, given the challenges it faces.
"By our estimates, 2007 should mark the sixth consecutive year during which earnings per share have grown by less than 3%, a scenario that raises the odds that this bank is acquired," he wrote in a research note issued last week.
In the past Mr. Lipkin has declined to discuss the possibility of a sale, saying only that Valley would do whatever is best for shareholders.
Mr. Cassidy said that Valley's stock, which was trading at $25.35 a share late Monday, could fetch $29 if it were acquired. Absent that possibility, it should be trading closer to $20, he said.
