DBRS Comments on Valley National Bancorp’s 2Q12 Earnings – Senior at A (low)

DBRS, Inc. (DBRS) has today commented on the 2Q12 earnings of Valley National Bancorp (Valley or the Company). DBRS rates the Company’s Issuer & Senior Debt at A (low) with a Stable trend. Valley reported net income of $32.8 million for the quarter, down from $34.5 million in the previous quarter, and from $36.9 million in 2Q11.

Positively, the Company delivered strong core loan growth, controlled expenses, maintained sound asset quality, and management noted that they believe Valley is already compliant with Basel III regulatory capital requirements. Nonetheless, Valley’s margin compressed significantly during the quarter and contributed to a $5.3 million decline in net interest income. Specifically, the margin (FTE) contracted by 18 basis points to 3.52% reflecting lower accretion recognized on purchased credit impaired loans (accounted for 11 basis points of the decline), as well as lower yields on new loans and securities. DBRS expects the margin to remain pressured given the persistent low rate environment.

The total loan portfolio grew by 9.8% on an annualized basis with total non-covered loans increasing by $300 million to $11.2 billion primarily reflecting growth within the residential and commercial mortgage portfolios. During the quarter, Valley originated over $478 million in new and refinanced mortgages retaining approximately 81% of these loans. The Company noted that it would be selling a larger percentage of originations into the secondary market and expects to record higher gain on sales in 3Q12 than it had recorded in 1H12. Moreover, Valley was also able to grow its auto portfolio by $14.1 million, as demand remains strong and pricing improved. The Company noted that the residential mortgage, commercial mortgage, and C&I pipelines are strong portending continued loan growth. Indeed, Valley expects residential refinance activity in 2H12 to be consistent with, or higher than, 1H12 levels.

In June 2012, the Company modified the terms on $100 million of FHLB advances by reducing the interest rates and extended the term. So far this year, Valley has modified $685 million of borrowings bringing down the weighted average interest rate on these borrowings by 82 basis points to 3.91%. DBRS notes that these modifications were completed without any losses.

During the quarter, non-interest income increased by $1.4 million to $24.0 million reflecting higher gains on securities, transactions, and trading gains partially offset by lower insurance commissions. DBRS notes that the change in the market value of the Company’s trust preferred securities caused net trading gains of $1.6 million, or $1.1 million after-tax, compared to a loss of $1.0 million, or $674,000 after taxes, in 1Q12. Meanwhile, non-interest expenses decreased by $3.0 million to $91.5 million from lower other expenses with the elimination of many expenses related to the State Bancorp acquisition.

Asset quality remains sound even with a modest increase in nonperforming assets (NPAs) and net charge-offs (NCOs). Specifically, NPAs increased by $15.8 million to $195.4 million primarily related to the addition of a large $11.8 million commercial real estate loan, as well as a $7.4 million increase in the estimated fair value of non-accrual securities. Overall, non-accrual debt securities total $45.9 million and have a combined unrealized loss of $5.8 million. The Company has an additional $113.6 million of troubled debt restructured loans that are performing and not included as loans 90 days or more past due and still accruing, or as non-accrual loans. Meanwhile, NCOs, excluding covered loans, increased $2.4 million during the quarter to $8.7 million, or 0.31% of annualized of average non-covered loans. The increase was primarily related to a $4.6 million commercial real estate partial charge-off based on a lower collateral valuation. Management noted that charge-offs should remain relatively stable in 2H12. Overall, the provision for losses on non-covered loans and unfunded letters of credit was $7.4 million compared to $5.7 million in 1Q12 and the allowance for non-covered loans and unfunded commitments was a sufficient 1.08% of total non-covered loans.

During the quarter, the Company’s tangible common equity to tangible assets ratio improved four basis points to a sound 6.78%. With the release of recent Basel III guidance, the Company noted that Valley is already compliant with the enhanced 2019 well capitalized definition for all regulatory ratios under Basel III reflecting lower risk weightings for residential mortgages with significant equity. Indeed, Valley has a residential mortgage adjusted mark-to-market loan-to-value ratio of approximately 48%.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents, the Federal Reserve, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Driscoll
Approver: Roger Lister
Initial Rating Date: 5 October 2009
Most Recent Rating Update: 20 December 2011

For additional information on this rating, please refer to the linking document under Related Research.