DBRS: VLY’s 3Q14 Results Highlighted by Solid Loan Growth & Lower Expenses

Summary:
• Valley reported net income of $27.7 million, down 6% sequentially primarily reflecting lower revenues, despite lower expenses.
• Positively, the Company reported solid loan growth, but the loan growth is outpacing core deposit growth.
• 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) 3Q14 results as sound. Positively, the Company reported solid loan growth and lower expenses, but the loan growth is outpacing core deposit growth. The Company noted that the majority of the loan growth was originated in the latter portion of the quarter, and that pipelines remain solid.

On October 20, 2014, Valley stated that its announced acquisition of 1st United received all necessary approvals and expects to close on the deal November 1, 2014. The vast majority of the expense savings will not start to be realized until the operating conversion is completed, which is currently scheduled for February 2015. However, Valley’s more robust product set will be introduced immediately.

Despite loan growth, net interest income declined by $2.8 million, as 2Q14 results benefited from higher cash flows related to the Company’s purchased credit-impaired (PCI) loan portfolios. As such, the net interest margin compressed 11 basis points to 3.16%. Positively, continued solid loan growth should offset further margin pressure. Meanwhile, excluding the impact related to the change in the FDIC-loss share receivable, noninterest income was down a substantial 12%, primarily reflecting lower insurance commissions, lower gains on sale of loans and weaker other income.

While the Company reported deposit growth, the growth was primarily from brokered money market account balances, that DBRS does not consider core in nature. Valley noted that competition for deposits increased during the quarter and did result in the Company’s deposit costs trending modestly upward.

Expenses continue to trend downward and remain an area of focus for the Company, especially given the difficult revenue environment. Valley noted that its branch modernization program has been going well, and as a result, expects to see further headcount reductions in the branches as it executes on this strategy.

Asset quality continues to underpin the rating. During the quarter, delinquencies, non-performing assets, and net charge-offs all improved and are the best levels seen in years. Moreover, capital remains sound with a tangible common equity to tangible assets ratio of 6.92%.

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.