DBRS Comments on Valley National Bancorp’s 3Q12 Earnings – Senior at A (low)

DBRS, Inc. (DBRS) has today commented on the 3Q12 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 $39.4 million for the quarter, up from $32.8 million in the second quarter, and from $35.4 million in 3Q11. Highlights of the quarter include robust mortgage banking results, positive operating leverage and still strong asset quality metrics. Given the difficult operating environment, Valley is focused on enhancing non-interest revenues and controlling expenses.

After portfolioing a significant portion of residential mortgage loan production in prior quarters, Valley sold most of its production in 3Q12. Specifically, the Company originated over $451 million in new and refinanced residential mortgage loans, of which approximately 82% of production was sold. As a result, gains on sales of residential mortgage loans totaled $25.1 million in the quarter, up materially from $3.1 million in 2Q12. Pipelines remain robust benefiting from Valley’s low fixed-price refinance program.

Net interest income remained relatively stable at $121.8 million even with margin pressure, as the Company benefited from average loan growth, as well as higher accretion on purchase credit impaired loans. Specifically, the margin (tax equivalent basis) compressed six basis points to 3.46% during the quarter driven primarily by lower securities yields. Given the persistent low rate environment, margin pressure should continue over the next several quarters.

The Company noted that it had completely offset lost revenues from the Durbin amendment and even grown service charges on deposit accounts by altering various fees.

Non-interest expenses increased modestly during the quarter to $91.5 million primarily reflecting higher OREO expenses, which more than offset a decline in salary and employee benefit expense. Valley is in the midst of evaluating its branch network and branch closings and staffing reductions are likely.

Period-end non-covered loans declined by $255.9 million during the quarter to $10.9 billion. Residential mortgage loan refinancings and some large repayments within the commercial loan portfolios more than offset some commercial real estate and automobile loan growth in the quarter. Valley noted that competition remains intense for quality borrowers within its footprint.

During the quarter, Valley recognized $4.7 million of other-than-temporary impairment charges related to a trust preferred securities issued by one particular bank holding company, as well as one private label mortgage security, both of which were subject to previous impairments.

Positively, with the exception of delinquencies, asset quality metrics improved in the quarter even including the effects of the new issued OCC guidance regarding treatment of consumer loans following Chapter 7 bankruptcies. Indeed, non-performing assets declined 5.2% to $185.3 million, or 1.66% of total loans. The OCC guidance resulted in 27 performing residential and home equity loans totaling a combined $3.0 million to be reclassified as non-accruals. Meanwhile, non-covered net charge-offs (NCOs) declined by $2.8 million during the quarter to $5.9 million, or 0.21% of average loans (annualized). DBRS notes that the impact of the OCC guidance on NCOs was immaterial reflecting Valley’s conservative credit guidelines. With the provision for loan losses exceeding charge-offs, the allowance for loan losses on non-covered loans and unfunded letters of credit increased to $122.1 million, or a sufficient 1.12% of non-covered loans.

Improved earnings and a smaller balance sheet strengthened the Company’s capital position. Specifically, Valley’s tangible common equity to tangible assets ratio improved 16 basis points to 6.94% during the quarter.

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: Alan G. Reid
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.