DBRS Comments on Valley National Bancorp’s 3Q13 Earnings – Senior at A (low)

DBRS, Inc. (DBRS) has today commented on the 3Q13 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 $27.1 million for the quarter, down from $33.9 million in the second quarter and from $39.4 million a year ago.

Highlights of the quarter include strong loan growth that contributed to higher net interest income, lower expenses, and the maintenance of its sound balance sheet. Nonetheless, significantly weaker mortgage banking revenues and a higher provision for losses resulted in lower sequential quarter earnings. Subsequent to the end of the quarter, Valley noted that it had sold $41.8 million (book value) of non-accrual securities. Besides realizing a net gain of $10.7 million, the sales materially decreases non-performing assets (NPAs – 25.1% of total NPAs at quarter-end), which will both be reflected in 4Q13 results.

Positively, net interest income increased $1.8 million sequentially to $111.7 million reflecting average loan growth and net interest margin expansion. Specifically, total average loans increased by $223.3 million to $11.2 billion primarily driven by commercial real estate loans, and to a lesser extent, residential mortgage loans and automobile loans. Moreover, loan pipelines especially within commercial real estate, are strong, which should contribute to additional loan growth. Meanwhile, the margin (FTE) increased five bps to 3.20% benefiting from a reduction in premium amortization driven by slower prepayment speeds. Moreover, maturing higher yielding average time deposits helped reduce this more expensive funding source by $144.5 million lowering deposit funding costs.

Non-interest income declined a material $10.5 million to $22.4 million primarily reflecting an $11.7 million decrease in net gains on sales of residential mortgages. The large decline was driven by residential mortgage loan originations falling over 48% during the quarter to approximately $248 million, while gain on sale margins contracted. The Company noted that it expects further origination volume declines in 4Q13. Additionally, Valley had a net loss of $1.0 million on the sale of assets primarily related to a write down on a repossessed aircraft.

Non-interest expenses declined by $885 thousand to $94.5 million. The Company noted that three branches were closed during the quarter and expects to close one additional branch in 4Q13. Moreover, mortgage business staffing levels have already been reduced by about a third. Given the difficult revenue environment, Valley will continue to pursue cost saving opportunities including the closure of additional branches or potentially more cuts in mortgage banking if production levels decline further than expected. Overall, the Company’s efficiency ratio was a high 70.46%.

Asset quality remains sound with total loan delinquencies, non-accrual loans, and NPAs all declining during the quarter. Specifically, NPAs declined 2.1% to $194.2 million, or 1.72% of non-covered loans. Moreover, including the subsequent sale of $48.3 million of non-accrual securities, NPAs would have been approximately 1.30% of non-covered loans. Meanwhile, net charge-offs on non-covered loans increased $2.1 million to $9.1 million, or 0.33% of average loans annualized, almost entirely driven by one $8.9 million loss related to a longstanding commercial loan relationship that filed for bankruptcy in October. The Company noted that it is optimistic regarding potential recoveries from this large charge-off, but the amount and timing of the recoveries are uncertain. Overall, the allowance for losses on non-covered loans and unfunded letters of credit remains sufficient at 0.97% of non-covered loans given Valley’s long history of manageable credit losses.

After redeeming approximately $15.0 million of trust preferred securities in July, the Company plans to redeem the remaining $127.3 million of trust preferreds issued by VNB Capital Trust I on October 25, 2013. Including this pending redemption, Valley’s Tier 1 capital ratio would have been 9.55% rather than the reported 10.64%. Meanwhile, Valley’s tangible common equity to tangible assets ratio remained relatively stable at 6.79%. DBRS notes that the Company has paid out slightly more than it has earned in dividends for 2013, which reduces financial flexibility.

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

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