How One Midsized Regional Bank Separates Itself From the Competition

When Ira Robbins took over in 2018 as CEO of Valley National Bancorp, one of his highest priorities was to broaden the bank’s strategic focus into new product and customer segments where it could be a meaningful player.

“When we started changing the organization’s direction five years ago, we said we weren’t going to be everything to everyone,” Robbins says. “We were going to be everything to someone and understand who that someone was and what the overall relationship looked like.”

Diversification and differentiation is a two-pronged strategy that should be on the minds of all bank CEOs and their boards of directors today. Continued pressure on the industry’s net interest margin is a threat to the banking industry’s long-term profitability that’s not going to ease anytime soon. Unless banks are able to develop new sources of revenue to counteract that pressure, “We’re left to think about cost reductions as opposed to building things because as the revenue side of the balance sheet comes down, all you’re able to do is focus on contracting expenses,” Robbins says.

And cutting costs is never as much fun as building a new business.

Robbins offered his views on the importance of diversification and differentiation to Bank Director Editor-at-Large Jack Milligan in advance of a panel discussion session Monday at Bank Director’s Acquire or Be Acquired Conference. The conference runs Jan. 30 to Feb. 1, 2022, at the JW Marriott Desert Ridge Resort and Spa in Phoenix.

The core niche at Valley National, a $41 billion asset regional bank headquartered in Wayne, New Jersey, is commercial real estate. “That’s who we are,” says Robbins. “And I think as an organization, most of the balance sheets that we understand are from a relationship perspective. People aren’t coming to us because we’re the cheapest in town. We have an ability to execute unlike any other organization that’s embedded in who we are from a credit perspective.” In other words, borrowers go to Valley National because they know their deals will get done.

Robbins wanted to replicate this approach in other customer segments, and in recent years the bank has diversified into auto lending, as well as banking for homeowners’ associations and cannabis businesses. But moving into a new customer segment or product line isn’t enough. Banks also have to find ways of differentiating themselves from their competitors in that niche. Increasingly, that is through the customer experience — with technology as the point of the spear.

A good example is Valley National’s push into cannabis banking, an initiative that began about three years ago. The bank spent the first year and a half studying the market from a strategic and operational risk perspective before it finally launched a treasury platform solution focused on marijuana-related businesses including dispensaries, cultivators, wholesalers and testing labs. The program is currently available in 13 states, and Valley National worked closely with several regtech companies to understand — from “seed to sale,” as Robbins puts it — the regulatory compliance requirements in each jurisdiction.

“We’ve been in the business for about a year and a half,” Robbins says. “It’s getting to be a decent-sized business for us. And it’s one that we think aligns with our risk appetite. It’s an opportunity in an industry that really isn’t being served today.”

But merely entering an underserved market doesn’t guarantee success if you’re not providing a differentiated customer experience. The cannabis business tends to be cash intensive. Producers and sellers need ways to get that cash to their bank, so Valley National set up a separate armored car service to handle collection. The bank also developed a mobile app called “ValleyPay” that is linked to a Valley National debit card and can be used to make purchases in a dispensary or retail store. “It’s the first ability to have a digital payment come in,” Robbins says. “And we’re the only bank in the country that’s beginning to offer it, so that’s pretty neat.”

Providing a differentiated customer experience is very much at the heart of Valley National’s diversification effort.

“To be honest with you, it’s…understanding what the customer experience looks like,” Robbins says. “What was the customer challenge? And what was the experience that we wanted to create?” While other banks are in the cannabis space as well, “ours is a specific niche [that is] focused on an experience that really isn’t being delivered.”

[You can read more about Valley National Bancorp and cannabis banking in the Q3 2021 issue of Bank Director magazine, available to subscribers.]

Getting Diverse Candidates to the C-Suite

*This video was originally published in Bank Director digital magazine in February, 2016.

U.S. Bank has a diverse workforce. It has a diverse board. But where it lacks diversity is the C-suite. U.S. Bank’s head of human resources, Jennie Carlson, talks about the bank’s strategy to change that.

She discusses:

  • U.S. Bank’s strategy for finding diverse candidates for the C-suite
  • The natural biases that every person has
  • Surprising demographic data that U.S. Bank found

The Risks of Banking on Mortgage-Backed Securities

1-17-Blackrock.pngMitigating the Risks of Mortgage-Backed Securities

In an environment where many investors are searching for yield, mortgage-backed securities (MBS) have generated significant interest. With higher yields, lower duration, and either implicit or explicit guarantees from the U.S. government against loss of principal and interest, MBS appear to be an attractive option relative to the broader Barclays U.S. Aggregate Bond Index.

Of course, MBS carry the additional risk of negative convexity, which can drive duration higher as interest rates rise (i.e. extension risk) and lower as interest rates fall (i.e. prepayment risk). While investors are compensated for this risk in the form of higher yields, the impact of duration extension in a rising rate environment should not be underestimated. Extension risk, however, can be mitigated through diversification into non-negatively convex bonds such as non-callable (i.e., bullet maturity) corporate securities.

A Word on Negative Convexity

The negative convexity in MBS is driven by the option that borrowers hold to repay their loan at any time. While similar to embedded call options in many corporate bonds, the negative convexity associated with the homeowner prepayment option is a more prevalent feature of MBS than corporate bonds. And while investors are compensated for the risk associated with negative convexity in MBS, the compensation earned for holding convexity risk is not significantly different than the compensation investors receive for holding investment grade credit risk.

Modeling the Potential Impact of Extension Risk

In a recent paper, we modeled the expected impact of extension risk for an MBS investor, and examined how rate changes effected the duration and total return of the Barclays MBS index. Our analysis demonstrated that:

  • The duration of a diversified set of mortgage pools can be expected to significantly extend in a rising rate environment.
  • Conversely, we found that the durations of investment grade corporate bonds and treasuries did not materially change when rates moved. When they did, the direction of the duration changes were inverse to rate moves (the indices are positively convex).
  • Because of this positive convexity, the modeled losses for treasury and corporate indices were much lower relative to the MBS index even though they carry lower yields and their (initial) durations were approximately equal.

MBS Extension in the Spring of 2013

While scenario analyses are helpful for understanding how securities may react to changes in rates, they rely on assumptions that may not be observed in practice. However, empirical data illustrating the impact of MBS duration extension can be observed in the sharp rise in rates between May and June of 2013 when the 5-year U.S. Treasury (UST) yield rose from 68 basis points (bps) to 139 bps.

Beginning in May with a duration of approximately 2.6 years, the Barclay’s MBS index declined 2.48 percent over the next two months as rates rose. Meanwhile, the Barclays 1-5 Year UST index and the Barclays 1-5 Year Corporate index, which had similar durations at the beginning of May, only declined by 0.87 percent and 1.54 percent respectively.

MBS duration extension was the most striking result of the surge in rates, with the duration of the MBS index climbing two years from 2.61 to 4.54 years. An investor holding the index at the beginning of May who was comfortable with a duration of 2.6 years, might have felt much different two months later when the duration extended to more than 4.5 years.

Change in MBS duration vs. changes in 5-year UST rates1-17_Blackrock_chart.png

Source: BlackRock, using Bloomberg data as of June 30, 2013. Past performance does not guarantee future results.

Conclusion: Managing Negative Convexity Through Diversification

In stable rate environment, MBS should provide an attractive return relative to comparable bullet bonds (bonds that are non-callable by the issuer). However, the higher yield of MBS does not come without added risk. In volatile rate environments, MBS can be expected to underperform bullet bonds, which are positively convex. Combining the two types of securities into a portfolio helps to diversify interest rate exposure through varying rate environments, lowering the overall risk of the portfolio.

U.S. Treasuries and corporate bonds can diversify a portfolio with excessive convexity risk. Corporate bonds also provide further diversification of the sources of yield. This extra layer of diversification historically helped during rising rate environments as increases in interest rates often occur because economic conditions are improving, lowering credit risk and tightening spreads. And while corporate bonds expose investors to the idiosyncratic risk of the issuers within a credit portfolio, this can easily be mitigated through the use of a broadly diversified vehicle such as an exchange-traded fund.

Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. The information included in this publication has been taken from trade and other sources considered to be reliable. We do not represent that this information is accurate and complete, and it should not be relied upon as such. Any opinions expressed in this publication reflect our analysis at this date and are subject to change.

Drivers of Bank Valuation, Part III: Size and Diversification

6-5-13_Commerce.pngA critical function of any bank’s board of directors is to regularly assess whether their activities and those of the bank’s management are driving value. This may be defined as value for shareholders, value for the community and the perception of strength among the bank’s customers and regulators. 

In the last two installments of this series, we explored the concept of tangible book value (TBV) and its relationship with bank valuation. We also looked at internal steps, such as promoting efficiency and growing loans, which boards could take to drive more revenue to the bottom line and drive bank value. 

In this final installment, we’ll look at two additional factors that drive value in both earnings production and market perception. 


The first of these is size. A bank’s size has a direct bearing on its value. The data show clearly that larger banks are perceived to be more valuable, according to the tangible indicators of open market trades of bank stocks and in bank merger pricing. In 2012, for example, there was a clear disparity in the public markets between banks with less than $1 billion in total assets (which traded below tangible book value on average) and those above $1 billion (which traded, on average, at a substantial premium to TBV). Regarding whole bank sales in 2012, banks with more than $500 million in assets sold  at a higher valuation, as a function of price to TBV, than banks smaller than $500 million in total assets (122.3 percent of TBV versus 113.6 percent). Likewise, banks with more than $1 billion in total assets sold at 129.3 percent of TBV versus 113.1 percent of TBV for banks below $1 billion in assets.

There are a number of reasons for this. Certainly greater scale means greater efficiencies, the ability to expand the customer base through a higher legal lending limit, the ability to spread the cost of carrying regulatory compliance over more assets, and the ability to offer products that smaller banks cannot afford to offer. 

A key consideration for a bank’s board should be a regular assessment of the institution’s size relative to market and the steps needed to achieve a critical mass that drives value. Small banks can achieve scale through raising capital and expanding the balance sheet organically—or pursuing mergers with compatible institutions. Either approach allows banks to grow in size, improve efficiency and grow value.


Another approach to growing value is to diversify the balance sheet and the income statement. The data shows that more diversified banks earn more and grow TBV faster. In 2012, banks with a real estate concentration of less than 60 percent earned as much as 90 basis points more on assets than peers more concentrated in real estate. 

Community banks, in particular, are more heavily concentrated in real estate by their very nature. The recent crisis points out the limits to this business philosophy, however, and should prompt some soul searching at the board level on how to avoid putting all the bank’s eggs in lower margin baskets. Commercial and industrial loans along with consumer lending have risks, to be sure, but prudent diversification into these areas offer opportunities for higher margins, more fee business, and more low cost deposits, all of which increase a bank’s overall valuation.

The Role of the Board

Driving shareholder value, whether on an ongoing basis or in a sale, is the key rationale for running the bank in the first place. Boards should aggressively work on all fronts to drive earnings, drive efficiency, drive margin and drive value. This is hard work and not without risks. But managing risk is central to a bank board’s obligations. Setting limits and managing tradeoffs within the market environment should be active rather than passive board activity. 

This work is hard and requires careful planning and execution. But the benefits to boards, management and—importantly—shareholders, of such efforts are considerable. 

Lee’s comments are strictly his views and opinions and do not constitute investment advice.