A loss on its investment in Fannie Mae and Freddie Mac preferred stock weighed heavily on Valley National Bancorp's third-quarter earnings, but Gerald H. Lipkin, the Wayne, N.J., company's chief executive, said its relatively stable credit quality puts it squarely in the camp of likely acquirers in the current environment.
Ideally, the $14.3 billion-asset Valley National would like some kind of government assistance to pursue a deal, Mr. Lipkin said in an interview Thursday after his company reported earnings.
"We were an active acquirer in the early 1990s under those circumstances, buying five banks in FDIC-assisted deals, and I think we're in a position to do this again now," he said.
Likely targets would be in the $3 billion-$5 billion asset range and would likely be located within Valley's current area of operations in northern and central New Jersey, Manhattan, and the eastern boroughs of New York City, Mr. Lipkin said. It would also consider buying a company that would bring it further east on Long Island or further south, particularly in or around Philadelphia.
He said he is interested in receiving a government capital infusion. Valley would likely be limited to $330 million, but that would boost its capital by a third and could help fund lending and acquisitions.
Valley said its third-quarter net income fell 90% from a year earlier, to $3.6 million, or 3 cents a share, principally because of a $70.9 million loss (or $44.1 million after taxes) on Fannie and Freddie preferred stock.
Excluding the one-time charge, Valley's core operating earnings rose 30% from a year earlier, to $47.7 million, or 35 cents a share, mainly because of the July acquisition of the $976 million-asset Greater Community Bancorp of Totowa, N.J.
Trading gains of $21 million, related to a drop in the fair value of Valley's subordinated debt, accounted for the unexpected rise in core operating earnings, Ken A. Zerbe, a Morgan Stanley analyst, wrote in a research report Thursday. The average analyst estimate called for core operating earnings of 28 cents a share, Mr. Zerbe said.
Valley's credit quality continued to perform better than many other banking companies. Its provision for credit losses more than doubled from a year earlier but rose 19% from the second quarter, to $6.9 million. Net chargeoffs rose 52% from a year earlier but fell 10% from the second quarter, to $4.4 million, but they accounted for only 0.19% of average loans.
Nonperforming assets rose 30% from a year earlier and 16% from the second quarter, to $41.8 million. But total nonperformers accounted for just 0.42% of total loans.
The rise in nonaccural loans was mainly because of four commercial loans worth $3 million that Valley had acquired from Greater Community. Its mortgage and home equity portfolios remained stable, but there was a small uptick in auto loan delinquencies. Mr. Lipkin said the increase was manageable.
Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets, said: "Valley has the credit quality that others would die for. They have very conservative underwriting standards, so you would expect them to maintain strong asset quality through the downturn." However, Mr. Cassidy also said Valley will likely suffer an uptick on delinquent commercial and industrial loans if the economy sours, though its credit losses would likely remain materially lower than those at other banking companies.
Net interest income rose 22% from a year earlier and 12% from the second quarter, to $116.6 million, because of the increase in loans from the Greater Community acquisition. The net interest margin rose 16 basis points from the second quarter, to 3.64%. Valley also increased loans organically.
Joseph Fenech, an analyst at Sandler O'Neill & Partners LP wrote in a note Thursday, "Clearly, after a long period of playing defense in an irrational environment, the company is now on the offensive, at a time when most competitors are back on their heels." Valley's Tier 1 capital ratio was 8.41%, and its total risk-based capital ratio was 10.12%, but Mr. Fenech wrote that it should consider raising more capital by utilizing the government's capital infusion program.
"We'd like to see more of a reserve cushion, given our view that credit conditions are likely to worsen (even for Valley) before they get better," he wrote.