There's Reason to Be Concerned About Valley National Bancorp Shares

Recently, we received the March Small Business Optimism Index from the National Federation of Independent Business (NFIB), and while the index moved higher month over month, there were warning signs inside the report, including one for smaller banks.

Loans became harder to obtain during February and March, and there was a drop in expectations for credit. Tighter credit conditions can make it a challenge for businesses, especially small ones, to expand and grow their business as they contend with timing constraints. Those tighter credit conditions also pose a challenge to revenue growth for banks, particularly smaller ones that tend to focus on deposits and loan growth to drive revenue.

By contrast, larger banks such as Citigroup Inc. (C) , Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) tend to have more diverse businesses that include investment banking and trading, credit cards, principal transactions, and wealth management that help them in an expanding economy and insulate them during a slowing one.

That's the revenue side of the equation, and there are challenges on the cost side as well for smaller banks.

The more well-known cost challenge has been rising compliance and other regulatory costs associated with the Dodd-Frank Act, but these institutions are also facing cyber-security costs and rising personnel costs. Those personnel costs initially were due in part to rising minimum wages, but more recently Bank of America announced it is raising its minimum wage this year, with plans to go to $20-an-hour in two years.

While JPMorgan shared that it will review its wage structure to remain competitive, odds are before too long we will see other banks boosting wages to remain competitive in order to keep existing talent and attract new workers.

What this means is smaller banks, such as Valley National Bancorp (VLY)  , are likely staring down some headwinds. Valley National shares caught my attention because of the $0.11 per share quarterly dividend it has been paying since exiting 2013.

At the current share price, that equates to a dividend yield of 4.4%. Over the last several years, the shares have traded between a low near $8 and a high just over $12.50, which yields a historical dividend yield in the 3.5%-5.5% range. Given the headwinds the company is facing, and the recent spate of missed earnings expectations during the back half of 2018, there are reasons to be concerned with Valley National shares.

Should revenue growth slow or begin to contract while Valley National's costs creep higher, the company, along with other small banks, could see their 2019 and 2020 earnings expectations move lower, much as they have been doing over the last 60-90 days.

Those adjustments have led VLY shares to trail the overall stock market's gains so far in 2019. What that means is the nice dividend yield at Valley Bancorp could become even bigger in the coming weeks and months.

Now to see what kind of outlook Valley National Bancorp issues when it reports its March quarter results on Thursday, April 25.

(Citigroup and JPMorgan Chase are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks Learn more now.)

At the time of publication, Versace had no positions in any securities mentioned.

Action Alerts PLUS, which Cramer manages as a charitable trust, is long C and JPM.