DBRS: VLY’s 1Q14 Earnings Dwn QoQ Primarily Reflecting One-time Gains in 4Q13; Loan Growth Continues

Summary:
• Excluding one-time revenue items that added $12.8 million to net income in 4Q13, net income would have been up $7 million QoQ to $33.8 million, reflecting an income tax benefit.
• Total non-covered loans grew an annualized 5% during the quarter with Valley originating over $600 million of new loans.
• DBRS rates Valley National Bancorp Issuer & Senior Debt at A (low) with a Stable trend.

DBRS, Inc. (DBRS) views Valley National Bancorp’s (Valley or the Company) 1Q14 results as mixed. Positively, the non-covered loan portfolio continues to grow with strengthening pipelines and expenses are trending downward. However, core revenues remain pressured from net interest margin compression, a dramatic slowdown in residential mortgage refinancings, and higher-than-peer funding costs. Overall, Valley’s strong balance sheet that is underpinned by a superior credit culture supports the ratings.

Adjusting for the 4Q13 terminated lease gain, securities gains(losses), and the mark-to-market of the Company’s trust preferred securities (now redeemed), core revenues declined 1% quarter-over-quarter (QoQ), primarily reflecting lower net interest income from net interest margin compression and lower gains on sale from declines in residential mortgage originations. Positively, strengthening loan pipelines and less pressure on the margin should benefit net interest income in coming quarters.

Expenses were well-managed and trended downward sequentially despite higher payroll-related expenses incurred in the first quarter, as well as higher snow removal costs related to the harsh winter. Moreover, staffing reductions, technology and other efficiency initiatives are expected to reduce expenses in FY14. This, in combination with expected net interest income growth should improve the Company’s currently high efficiency ratio.

Even with the weather dampening demand in the first two months of the quarter, Valley originated over $600 million of new loans. Although still heavily weighted towards commercial real estate, consumer loan demand has picked up as well. The Company noted that loan pipelines are improving across asset classes and geographies, although the New Jersey market remains a laggard compared to the New York City area and Long Island. Overall, total non-covered loans grew an annualized 5% during the quarter.

Asset quality continues to improve, but net charge-offs increased during the quarter. Specifically, Valley decided to transfer $35.6 million of nonperforming loans to held for sale resulting in $8.6 million of charge-offs, $6.1 million of which was already reserved for. All of the loans are expected to be sold during 2Q14 at or near book value with the vast majority already closed or having substantial non-refundable deposits against them. Meanwhile, capital remained sound with key metrics all showing modest improvement during the quarter.

DBRS rates Valley National Bancorp Issuer & Senior Debt at A (low) with a Stable trend.

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