DBRS Comments on Valley National Bancorp’s 4Q12 Earnings – Senior at A (low)

DBRS, Inc. (DBRS) has today commented on the 4Q12 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 $36.8 million for the quarter, down from $39.4 million in the third quarter, but up from $24.5 million in 4Q11.

Residential mortgage originations reached $531 million for the fourth quarter, a record high, even with a noticeable adverse impact from Hurricane Sandy. Nonetheless, gains on the sales of residential mortgage loans fell $9.5 million to $15.6 million even with slightly higher sales primarily reflecting the change in valuation of loans held for sale. The Company recently introduced its $499 refinance program in New York during the fourth quarter. Given New York’s relatively higher refinancing costs, DBRS expects this program to be very well received in the New York market and help keep mortgage origination volume robust.

Total non-covered loans declined by $99.3 million to $10.8 billion primarily reflecting some large commercial loan prepayments, as well as the Company’s decision to sell the majority of its residential mortgage originations. Positively, commercial and industrial (C&I) loan 4Q12 originations of $244 million were a record for Valley. Moreover, total commercial (includes CRE and C&I) originations for 2012 of $1.4 billion was also a record, as the Company realizes the benefits of investments in the franchise. Management expects 2013 originations to remain at or near the record level. DBRS notes that covered loans of $180.7 million comprised just 1.6% of Valley’s total loan portfolio at year-end.

Asset quality remains very sound even with the increase in delinquencies and non-performing assets in 4Q12. Specifically, total non-performing assets increased $10.2 million to $195.5 million, or 1.80% of non-covered loans, primarily reflecting several loans that were negatively impacted from Hurricane Sandy and one $8.8 million C&I loan that was previously impaired and restructured. DBRS notes that the C&I loan is currently performing under its new terms. The provision for losses on covered loans decreased $2.1 million to $5.2 million, which more than covered net charge-offs of $4.3 million. Overall, the allowance for non-covered loans and unfunded letters of credit as a percentage of total non-covered loans was sufficient at 1.13%.

Net interest income declined by $3.3 million to $118.5 million reflecting continued net interest margin pressure and lower average earning assets. Specifically, the margin (FTE) compressed five basis points to 3.41% during the quarter, as declines on earning asset yields outpaced the declines in funding costs. The margin did benefit from prepayment penalties, but lower accretion on covered loans contributed four basis points of the decline. With interest rates expected to remain low, margin pressure is expected to continue. Meanwhile, non-interest income declined by $6.7 million to $40.5 million primarily reflecting the decrease in net gains on sales of residential mortgage loans. Hurricane Sandy also contributed to almost $1 million of impaired branch location assets, which DBRS does not consider as core.

Non-interest expense increased by $2.4 million during the quarter to $93.2 million reflecting higher net occupancy and equipment expense, as well as higher professional and legal fees.

Given the Company’s well-managed credit risk, capital remains solid with a tangible common equity to tangible assets ratio of 6.71%. Valley noted that it remains interested in strategic acquisitions at the right price.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]