It has been a bruising 18 months for Yardville National Bancorp, but its stock price continues to hold up, because investors are betting it is only a matter of time before it sells itself.
The most recent "black eye," as one analyst called it, was the surprise revelation Friday that the $2.6 billion-asset Hamilton, N.J., company expects to slash its previously reported 2006 earnings by about $1.6 million, after discovering problems with its financial controls. The stock price dipped initially on the news, but rebounded since then. It closed Wednesday at $37.57 - or roughly two times book value.
"Bad news seems to be good news for this stock," said Joseph Fenech, an analyst at Sandler O'Neill & Partners LP. "The stock, to me, seems to trade on the possibility of a sale of the bank and really nothing else."
The shares have rarely dipped below $35 in the last 18 months, though Yardville has been operating under an enforcement order since September 2005 and its earnings have declined from a year earlier in each of the last six quarters.
Yardville's largest shareholder, the activist Lawrence B. Seidman, has long been agitating for the company to change management or consider a sale, citing its lackluster performance. He lost a proxy battle last year and is preparing for another one this year.
"Every quarter they have another problem," Mr. Seidman said Monday. "The question is: How long is this going to go on? Somebody has to get in there and start fixing the problems."
To this point Yardville has been determined to stay independent. Mr. Seidman said in a recent Securities and Exchange Commission filing that it reportedly rejected an offer of $41 a share late last year. Yardville has not said whether it received such an offer. (The filing relates to one of his several onging battles with Yardville: his accusation that a board member improperly leaked information to a shareholder.)
And if Yardville officials are starting to rethink their position, Patrick M. Ryan, its chief executive officer, is not saying. "We do not comment on market speculation or rumors," Mr. Ryan said Monday.
Still, analysts said that the latest earnings blow could accelerate a takeout, though Mr. Fenech speculated that it is unlikely the price would be much higher than where Yardville's shares are currently trading. Yardville could fetch $42 to $43 a share if the price were based solely on its "franchise value," he said - most of its 33 branches are in central New Jersey - but a discount would have to be applied, because of its elevated credit risk.
The possibility of losing the proxy fight also could prompt the board to consider a sale, Mr. Fenech said. He pointed out that both Mr. Ryan and F. Kevin Tylus, Yardville's chief operating officer, are up for reelection to the board. If it starts to look like they might lose their seats, the company might be looking to sell before the August annual meeting, Mr. Fenech said.
He also wondered if Yardville could be hit with a more severe enforcement order. The 2005 formal agreement with the Office of the Comptroller of the Currency relates, in part, to credit documentation, and last week's announcement shows that Yardville has not fixed those problems, he said.
"If the OCC tells you to correct something 18 months ago, and 18 months later it's still not corrected, my concern is you could see more severe action against the company," Mr. Fenech said.
Mr. Ryan said the upcoming earnings restatement arose from problems with the risk ratings on "a few" loans, which require Yardville to set aside almost twice as much money for potential losses. The fourth-quarter loan-loss provision is expected to jump to $5.1 million, or nearly double the previously reported figure. He said there would be no change in nonperforming loans or chargeoffs.
Yardville reported Jan. 30 that it lost $8.7 million, or 79 cents a share, in the fourth quarter, because of a balance-sheet restructuring. Mr, Ryan said that it would restate those results by the end of the month and that the fourth-quarter loss is expected to rise by $1.6 million, or 15 cents a share. It previously reported full-year earnings of $6.9 million, or 61 cents a share.
Yardville said that it is conducting "an expanded review" of its loan portfolio, because of the recently discovered problems, and that the review could result in an even bigger earnings revision. But Mr. Ryan said his company does not anticipate any impact on future results from the problems. "I believe the issue has been addressed and put behind us."
He would not say whether the news might impact the board contest. Though the annual meeting is scheduled for August, Mr. Seidman is suing Yardville to conduct it earlier. He contends that the law requires it to be held within 13 months of the previous year's meeting, which was held May 3.
