A New Jersey community banking company is seeking to hop the Canadian border as it expands its indirect auto financing ties with a national insurer.

Wayne-based Valley National Bancorp has applied for Federal Reserve Board permission to establish a consumer finance company in the Toronto area. The $3.9 billion-asset corporation is also awaiting approval from the Canadian Minister of Finance.

Federal Reserve approval is expected within a couple of weeks, according to Gerald H. Lipkin, Valley's chairman and chief executive.

The subsidiary would serve as Valley's Canadian base for third-party auto lending through State Farm Insurance Co., Bloomington, Ill. Bank officials don't expect to make other consumer loans in Canada.

"We believe there's an opportunity in Canada," Mr. Lipkin said. "We feel we'll be able to generate a considerable volume of automobile lending" through State Farm, he said. "This is an opportunity for us to expand our base with them."

Valley has had a relationship with State Farm since the 1950s. Currently, the insurer deals exclusively with Valley for third-party lending in a number of East Coast states.

State Farm has operated in Canada in the past, but hasn't had much success with third-party auto lending in that country, said Steve L. Turbett, spokesman for the company's car finance plan unit. Another American bank tried to start an operation in Canada with State Farm about 10 years ago, he said, but it didn't generate enough business.

And since the large Canadian banks aren't interested in working with State Farm, the company didn't pursue the idea much before it approached Valley, he added.

Valley is the only bank that State Farm is currently planning to use in Canada, he said.

"It was a matter of a good relationship with Valley and we're looking to help our Canadian (customers)," Mr. Turbett said. "It was almost a nonchalant asking and they said they'd take a look at it. That's why they're going into Canada - to grow with State Farm."

Valley operates 64 offices in northern New Jersey and has an acquisition pending of Lakeland First Financial Group Inc., Succasunna, N.J., which will add 16 branches and bring its assets to $4.6 billion by this summer. The bank has no operations in other states.

Elizabeth A. Summers, first vice president of Ryan Beck & Co., downplayed Valley's border expansion, noting that the bank isn't trying to establish branches in Canada.

"I wouldn't focus on the foreign subsidiary aspect," she said. "It's just an extension of their State Farm relationship."

The State Farm relationship has been a boon to Valley, providing guaranteed loan customers without the need for extra advertising, Ms. Summers said. That's allowed Valley to operate with an efficiency ratio - the amount of expense it takes to generate $1 of revenue - of only 45%, virtually unheard of among commercial banks. And Valley doesn't have much fee income from specialized businesses, which some larger banks use to keep low efficiency ratios.

"An important factor behind that is this relationship," she said. "The bank pays a commission to State Farm, but it's still a lot less than if you went and opened up a branch in all these areas. You've got all the State Farm agents originating loans for you."

Valley has just over $560 million in direct and indirect auto loans in its total loan portfolio of $2.2 billion. Most of its car loans are indirect, Mr. Lipkin said.

Mr. Lipkin declined to detail how much of the portfolio is linked to the State Farm relationship, but said State Farm is the bank's largest third- party source other than Valley's network of about 200 car dealers.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.