DBRS Comments on Valley National Bancorp’s 1Q13 Earnings – Senior at A (low)

DBRS, Inc. (DBRS) has today commented on the 1Q13 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 $31.3 million for the quarter, down from $36.8 million in the fourth quarter and from $34.5 million a year ago.

Residential mortgage originations reached another record in 1Q13, up almost 9% sequentially to $577 million. Despite selling more production in 1Q13, gains on sales of residential mortgage loans declined by $576 thousand to $15.1 million reflecting tighter spreads. Positively, the Company expects the mortgage pipeline to remain strong, especially since the roll out of its popular low fixed-price refinance program remains relatively new in its New York and Pennsylvania markets.

Net trading gains and losses, which almost entirely reflect the non-cash mark to market gains and losses associated with the Company’s trust preferred securities carried at fair value, were a loss of $2.2 million in the quarter following a gain of $2.2 million in 4Q12.

The non-covered loan portfolio declined by $191.9 million, or 7.1 % on an annualized basis, to $10.7 billion. Management noted that competition for high quality borrowers remains intense and that Valley also had some large repayments and reduced line usage with the commercial loan portfolios. Moreover, many lenders in Valley’s footprint have starting easing underwriting standards and are being aggressive on pricing, which management is not willing to do reflecting the Company’s strong credit culture.

As a result of lower average loans, net interest margin compression, and two fewer days in the quarter, net interest income declined by $8.5 million to $110.0 million sequentially. On a tax equivalent basis, the net interest margin contracted a high 23 basis points to 3.18% driven by lower yields on both loans and securities. The Company expects to deploy more of its excess liquidity (nearly $1 billion in 1Q13) into loans and securities in 2Q13 to help offset some of the margin pressure.

Reported non-interest income decreased $2.5 million to $31.3 million sequentially. Excluding securities gains, trading gains and losses, and changes in the FDIC loss-share receivable, core non-interest income would have increased 3.6% to $32.7 million. Mortgage banking revenues are expected to remain an important contributor to overall earnings.

Positively, expenses were well-controlled declining modestly to $95.4 million despite higher pension costs, seasonal increases in payroll taxes, and additional incentive stock compensation expense. Given the difficult revenue environment, Valley is very focused on expenses to improve efficiencies by closing branches, reducing hours, and select layoffs.

Asset quality remains sound. During the quarter, non-accrual loans declined across all asset classes, but an increase in the fair value of non-accrual debt securities more than offset the declines increasing non-performing assets modestly to $200.3 million, or 1.88% of non-covered loans. DBRS notes that excluding the change in fair value on the debt securities, non-performing assets would have declined. Meanwhile, non-covered net loan charge-offs increased by $5.5 million to $9.8 million, or 0.36% of average loans (annualized), during the quarter primarily related to one large $5 million loss resulting from fraudulent activity.

Capital metrics remain solid with regulatory capital ratios all improving in the quarter, while the Company’s tangible common equity to tangible assets ratio remained stable at 6.71%.

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

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