The trade-offs in a N.J. bank's out-of-state expansion plan

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Valley National’s long-term success hinges on its ability to gain more traction in Florida.

The Wayne, N.J., company has spent three years building scale in the Sunshine State, beginning with its late 2014 purchase of 1st United Bancorp. The $23.4 billion-asset company now has 31 branches in Florida that are responsible for about 13% of its total loans.

The Florida franchise, which has been growing at a double-digit rate, is expected to play an even bigger role as Valley embarks on a project intended to cut costs, boost loan growth and add more fee income over the next two years.

Those goals may help explain why Valley agreed on Wednesday to buy the $4.4 billion-asset USAmeriBancorp for $816 million in what would be its biggest bank acquisition. The deal would also expand its branch network in Florida by nearly 50%.

Still, the deal presents a number of potential trade-offs from a risk perspective.

On one hand, it allows Valley to diversify even more beyond its home turf of New Jersey and New York and it presents a chance to reduce exposure to commercial real estate. USAmeriBancorp also has 15 branches in Alabama that provide even more opportunity to meet those goals.

But the deal also increases Valley’s exposure to Florida, a state that suffered mightily during the financial crisis, scarring many out-of-state banks that bet on continued growth. Valley also plans to make more auto loans, an area where some banks have pared back in recent months.

The key will be discipline, said Gerald Lipkin, Valley’s chairman and CEO.

“We will not stretch outside of existing credit policy,” Lipkin said during a conference call Wednesday to discuss the deal. “We feel comfortable at this stage with what we're booking … So far we have decided not to play in certain markets and we feel that's indicative of how we think, both analytically and subjectively, about where we want to grow loans.”

Valley, meanwhile, wants Florida eventually to make up about a third of the company’s franchise, Lipkin said in an interview. “It’s a great marketplace and it’s growing nicely,” he added.

The Florida economy has been expanding at twice the national rate, and industry experts said the state remains relatively safe for expansion.

Florida “will continue to be, for a long period of time, a state where there’s a lot of growth,” said Jon Bruss, CEO of Fortress Capital Partners and a former director at GulfShore Bancshares, which was sold to Seacoast Banking.

Valley also expects the deal to help it reduce commercial real estate exposure. The ratio of CRE to total risk-based capital should fall to 417% from 433% after the deal closes, said Ira Robbins, Valley’s president.

Banks typically get more regulatory scrutiny when that ratio exceeds 300%.

Valley intends to make more mortgages in Florida, which accounted for 6% of its $405 million in second-quarter application volume. Nearly 90% of Valley’s applications were in New Jersey and New York.

Management also plans to make more indirect auto loans in the state. Nearly a fifth of Valley’s auto loan production in the second quarter came from Florida, Robbins said during the conference call.

Auto lending is a product that certain investors and banks “have become wary of” because of a rise in delinquencies and loosening terms such as extended maturities, said Eric Zwick, an analyst at Stephens.

The moves are part of an effort to add $3 million in annual revenue by mid-2019, with three-fourths of the increase involving fee income. Specifically, management wants noninterest income to make up 15% to 20% of total revenue; that contribution was 13% on June 30. Valley also wants to increase annual organic loan growth from 6% today to 8-10%.

Valley also plans to cut $19 million in annual expenses, with most of the reductions set to occur next year. Roughly 70% of expense savings will involve compensation, while another 20% are tied to IT contracts. The plan is to lower the efficiency ratio below 55% in mid-2019; the ratio currently stands at 59.6%.

Though Florida will play a big role in those efforts, Lipkin said Valley remains committed to its northeastern roots.

“We’re not abandoning our franchise in the New York, New Jersey, Long Island area,” Lipkin said. “We love doing business here.”

Valley, which has bought 29 banks and nonbanks in its history, will continue to keep an eye out for acquisitions.

“M&A tends to be opportunistic,” Lipkin said. “If a good opportunity were to present itself … we’d be receptive.”

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