Valley lands rare ‘backdoor capital raise’ with latest acquisition

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Valley National Bancorp in Wayne, N.J., has gone back to its roots with its latest bank acquisition.

The $32.5 billion-asset company, which spent much of the last five years building a franchise in Florida, revisited M&A in its home state with an agreement to buy Oritani Financial in Township of Washington.

The acquisition — the fifth-biggest bank deal announced this year and Valley's first purchase in New York or New Jersey since 2012 — stands out in several other ways.

The $4.1 billion-asset Oritani is the first acquisition for Ira Robbins since he succeeded Gerald Lipkin as Valley's CEO in late 2017. The deal is also expected to be neutral, if not additive, to Valley's tangible book value.

Valley's Tier 1 capital ratio will increase from 9.4% to 10% when the deal closes.

The acquisition is essentially a "backdoor capital raise" for Valley, said Sandler O'Neill analyst Frank Schiraldi. Such deals are rare, and Robbins' determination to avoid dilutive acquisitions could make this a "one-and-done situation" for Valley, Schiraldi added.

Robbins said as much during a Wednesday conference call to discuss the deal.

"I think we have a lot of opportunities internally just organically on our own," Robbins said. "So I don't think M&A is a requirement by any means. It's not something we're targeting."

Robbins' thinking represents a shift from Lipkin, who aggressively expanded in Florida between 2014 and 2017 by spending $1.3 billion on three banks. When Valley agreed to buy USAmeriBancorp in mid-2017, management forecast a nearly five-year period for earning back dilution to the company's tangible book value.

Valley shouldn't have any trouble deploying the capital it will gain from buying Oritani. The company's capital levels fell slightly last year after it reported 13% loan growth from a year earlier.

Robbins will likely find ways to book more loans outside of New Jersey, Schiraldi said.

"They're growing more quickly — certainly in Florida and New York — and I think that will continue," he said.

Buying Oritani should help Valley cut more costs, which has been a focus for Robbins and his team. Valley's adjusted efficiency ratio fell to 54.8% at March 31 from 60.29% a year earlier.

Valley is targeting an efficiency ratio of 51.3% as it integrates Oritani.

The company plans to cut about half of Oritani's annual operating expenses, excluding potential savings tied to branch closings. All of Oritani's branches are located within three miles of a Valley branch or another Oritani location.

"There are literally branches that are in the same shopping center," Rick Kraemer, Valley's investor relations officer, said during Wednesday's call.

Robert Bolton, president of Iron Bay Capital, which owns shares of Oritani, said investors should like the deal's accretive aspects.

"There is certain branch-geographic overlap and not a big culture or client-synergy concern," Bolton said.

Valley will have 10% deposit market share in New Jersey's affluent Bergen County. It would be the county's fourth-biggest bank, trailing Bank of America, TD Bank and JPMorgan Chase, based on data from the Federal Deposit Insurance Corp.

Oritani, which is selling for 140% of its tangible book value, did not use an auction process, Robbins said. Oritani has been working since December 2017 to address an informal agreement tied to Bank Secrecy Act compliance.

Valley is comfortable with Oritani's progess on BSA compliance, with Robbins telling analysts that the agreement should have no impact on his company.

"The integration complexity — or lack thereof in this instance — was a critical component to this deal," Robbins said.

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