DBRS: VLY’s Reports Higher 2Q14 Pre-tax Income QoQ; Loan Growth, Margin Expansion

Summary:
• Valley reported net income of $29.5 million, down sequentially primarily reflecting a 1Q14 tax benefit, but pre-tax income increased a strong 20%.
• Highlights of the quarter include the announced acquisition of 1st United, continued loan growth, net interest margin expansion, sound expense control, and the sale of non-performing loans.
• DBRS rates Valley National Bancorp Issuer & Senior Debt at A (low) with a Stable trend.

DBRS, Inc. (DBRS) considers Valley National Bancorp’s (Valley or the Company) 2Q14 results as solid with continued loan growth, deposit growth, net interest margin expansion, sound expense control, and the maintenance of a strong balance sheet. The Company noted that the loan pipeline has remained strong, particularly within the commercial pipeline with the exception of construction lending. Moreover, demand across most consumer segments has also strengthened in 3Q14.

During the quarter, Valley announced its acquisition of 1st United Bancorp, Inc., a bank holding company headquartered in Boca Raton, Florida, with approximately $1.7 billion in assets, in an all-stock transaction valued at approximately $312 million. Subject to approvals from regulators and other customary approvals, the transaction is expected to close in 4Q14. Following the announcement, DBRS confirmed Valley’s ratings and maintained the Stable trend.

Net interest income increased by $3.4 million to $117.4 million reflecting primarily increased cash flows related to the Company’s purchased credit-impaired (PCI) loan portfolios, as well as organic loan growth. Non-covered loan growth was driven primarily by commercial and industrial and indirect auto loans, and to a lesser extent commercial real estate. Positively, originations strengthened in the Company’s New Jersey footprint but still trail the more robust New York City metro area. PCI-related income also helped bolster the net interest margin, which expanded 7 basis points to 3.27% on a tax equivalent basis, but the margin will likely be pressured in 2H14. Meanwhile, excluding the impact related to the change in the FDIC-loss share receivable, noninterest income was up modestly sequentially.

For the second consecutive quarter, Valley has made progress bringing down non-interest expenses. Excluding the impacts of higher amortization of tax credit investments caused by valuation write-downs and the change in the FDIC-loss share receivable, the Company’s efficiency ratio would have been a still high 65.87%, but improved from 68.27% in 1Q14.

Asset quality remains sound and continues to support the rating. Positively, non-performing assets decreased and the Company had non-covered loan net recoveries. DBRS notes that Valley sold non-performing loans totaling $17.2 million in the quarter and has another $7.9 million remaining in held for sale.

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.