DBRS Confirms Valley National Bancorp at A (low); Trend Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of Valley National Bancorp (Valley or the Company) and its rated commercial bank subsidiary, including Valley’s Issuer & Senior Debt at A (low) and Short-Term Instruments at R-1 (low). The trend on all ratings is Stable. The ratings action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

Valley’s ratings are underpinned by a superior credit culture that has allowed the Company to remain profitable every quarter since its founding in 1927. As such, maintaining this corporate and credit culture over time is key to maintaining the rating. The ratings also reflect its solid deposit franchise in demographically attractive areas of northern and central New Jersey, Manhattan, Brooklyn, Queens, and Long Island. Ratings are constrained by a heavy reliance on spread income, and to a lesser extent, a lack of geographic diversification.

Over the past year, earnings, the funding profile, asset quality, and capital all improved. Moreover, Valley was able to expand its franchise with the acquisition of State Bancorp, Inc. (State), which was successfully integrated in 2012. In total, over 20% of the Company’s branches are now in New York including a New York headquarters located at One Penn Plaza in Manhattan. DBRS notes that without a meaningful improvement in fee-based revenue generation, which accounted for approximately 20% of total revenues in 2012, the ratings will remain well-placed within its current rating category of A (low).

Net income for 2012 was $143.6 million, an improvement from $132.5 million in 2011. The increase reflected lower credit costs, higher gain on sales of residential loans, and lower OTTI, partially offset by higher expenses. Most recently, Valley reported net income of $36.8 million for the fourth quarter, down from $39.4 million in the third quarter, but up from $24.5 million a year ago. While organic loan growth and the State acquisition contributed to higher net interest income even with net interest margin compression, the primary driver of improved earnings has been Valley’s very successful low-cost refinance program that is likely to remain a strong contributor to earnings over the course of 2013. Indeed, for 2012, Valley originated $2.0 billion of new and refinanced residential mortgage loans. Of this amount, the Company sold approximately $961 million contributing to a $36.3 million improvement in gains on sales of loans, net.

While organic loan growth within the non-covered loan portfolio was relatively stable in 2012, originations were very strong. Indeed, 4Q12 commercial and industrial (C&I) loan originations of $244 million were a record for Valley. Moreover, total commercial (includes CRE and C&I) originations for 2012 of $1.4 billion were 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. Importantly, the Company believes that the storm did not materially impact the vast majority of its customer’s ability to repay their loans and is not expected to materially impact Valley’s fundamentals. 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%

Given the Company’s well-managed credit risk, capital remains solid with a tangible common equity to tangible assets ratio of 6.71%. DBRS notes that the dividend payout ratio in 2012 was a high 89% of net income and the Company remains intent on maintaining a high payout. Valley remains interested in strategic acquisitions at the right price. Moreover, management has indicated that the Company will not acquire another bank unless the acquisition will increase earnings within one year.

Valley National Bancorp, a commercial bank headquartered in Wayne, New Jersey, had $16.0 billion in assets at December 31, 2012.

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 the 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.