DBRS Comments on Valley National Bancorp’s 2Q13 Earnings – Senior at A (low)

DBRS, Inc. (DBRS) has today commented on the 2Q13 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 $33.9 million for the quarter, up from $31.3 million in the first quarter and from $32.8 million a year ago.

Highlights of the quarter include positive operating leverage, loan growth, as well as optimism for future loan growth. Valley also noted that residential mortgage origination activity should continue to decline and that it would portfolio a much higher level of originated mortgages, as opposed to selling them, given the higher rates on mortgages. The Company also guided towards net interest income and net interest margin (NIM) expansion in 2H13, if interest rates remain at current levels, or higher.

Total non-covered loans increased by $91.0 million, or 3.4% on an annualized basis, to $10.7 billion, reflecting strong CRE and auto loan growth, as well as the purchase of approximately $162 million of residential mortgage loans. DBRS notes that excluding the purchased loans, non-covered loans would have declined by $71 million, or 2.6% on an annualized basis, driven primarily by lower C&I balances. Nonetheless, total originations for the quarter were near record levels and loan pipelines have strengthened, which portends well for 3Q13 loan growth.

Despite higher average interest earning assets sequentially, net interest income declined modestly to $109.9 million reflecting NIM pressure. Specifically, the NIM, on a tax-equivalent basis, compressed three basis points to 3.15%. Positively, covered purchased credit- impaired (PCI) loans had better than expected cash flows contributing to a $2 million increase in accretion. Moreover, this trend is expected to continue in both the Company’s covered and non-covered PCI loan portfolios. DBRS notes that loan yields were actually higher in 2Q13 compared to 1Q13 reflecting the accretion.

Residential mortgage loan originations were negatively impacted by the higher long-term interest rates seen in the quarter, declining by over 16% sequentially to a still solid $483 million. Even with higher levels of loan sales, gains on the sale of residential mortgage loans declined by $694 thousand to approximately $14.4 million reflecting tighter margins. Adjusting for securities gains and the non-cash mark to market losses on the Company’s trust preferred securities carried at fair value, non-interest income increased to $33.1 million from $29.5 million in 1Q13 reflecting broad-based growth with the exception of the aforementioned decline on the sale of residential mortgage loans.

Non-interest expenses were relatively stable declining modestly during the quarter to $95.3 million. During the quarter, the Company froze its non-contributory defined benefit pension plan, which is expected to save approximately $2.1 million in 2H13. Moreover, Valley has already downsized their mortgage banking staff by approximately 20% for the anticipated decline in mortgage banking activity and plans to close three additional branches during 3Q13.

Positively, asset quality improved during the quarter with lower delinquencies, non-accrual loans, non-performing assets (NPAs), and net charge-offs (NCOs). Specifically, NPAs decreased by $1.9 million to $198.4 million, or 1.85% of total non-covered loans. Meanwhile, non-covered NCOs declined to $7.0 million, or 0.26% of average loans (annualized), compared to 0.35% in 1Q13, which included a $5.0 million charge related to one commercial loan participation.

Capital remains sound with regulatory capital ratios remaining relatively stable, while Valley’s tangible common equity to tangible assets ratio strengthened 9 basis points to 6.80%. With trust preferred securities being phased out of Tier 1 capital by January, 1 2016, Valley announced it would redeem approximately $15.0 million of trust preferred securities on July 26th. The Company anticipates redeeming the remainder of its trust preferred securities in a timely manner.

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

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