DBRS Confirms VLY at A (low) Following CNLBancshares, Inc. Acq. Announcement; Trend Remains Stable

DBRS, Inc. (DBRS) has today confirmed all ratings of Valley National Bancorp (Valley or the Company) and its rated commercial bank subsidiary, including Valley’s Issuer & Senior Debt at A (low). The trend on all ratings remains Stable. The ratings action follows the Company’s announcement to acquire Orlando, Florida-based CNLBancshares, Inc. (CNLB), a bank holding company with approximately $1.4 billion in assets, in an all-stock transaction valued at approximately $207 million. Subject to approvals from regulators and other customary approvals, the transaction is expected to close in 4Q15.

DBRS’s confirmation is based on Valley’s proven track record of acquiring and successfully integrating acquisitions. Indeed, just this past February, Valley successfully completed the operations and systems integration of 1st United Bancorp, Inc. (1st United), which was slightly larger than CNLB and also based in Florida. Importantly, 1st United has exceeded all original expectations when the deal was announced. For the CNLB acquisition, Valley reviewed approximately 80% of the commercial loan portfolio, as well as some residential mortgages taking a loan mark of 3.2%. The deal is expected to be accretive to earnings in 2016, adds further scale in Florida (as well as several new Florida markets), and pro-forma capital metrics remain relatively stable. The Stable trend incorporates DBRS’s expectation that this acquisition will be integrated without significant issues. DBRS would not view favorably any additional acquisitions until CNLB has been fully integrated.

As noted following the 1st United acquisition announcement, DBRS remains skeptical of non-contiguous acquisitions, particularly in Florida where many banks have struggled historically, even with the apparent early success of the 1st United acquisition. Valley has noted that it would eventually like to see Florida-based loans, a market that has been considerably more volatile than its legacy markets, comprise up to a third of the total loan portfolio (pro forma Florida loans are approximately 14% of the total loan portfolio. Lastly, with a third sizeable transaction since 2012, Valley must work even harder to ensure its strong corporate culture is fully embraced in its newer markets. Mitigating these concerns, technological advances has made managing and operating non-contiguous branches considerably easier and Valley has signed CNLB’s CEO and CFO to employment agreements, to ensure a smoother transition.

CNLB is a $1.4 billion in assets holding company that operates 16 offices focused in five of the top 6 MSAs in Florida. While CNLB’s loan portfolio is predominantly comprised of commercial real estate including a sizeable amount of construction loans, CNLB has reduced its problem loans considerably since the downturn and has been profitable since 1Q14. On a pro-forma basis, CNLB comprises approximately 7% of the Company’s total assets. Similar to the 1st United deal, Valley plans to increase CNLB’s lending limits, as well as introduce Valley’s more robust product offerings, including indirect auto, wealth management and trust services. Management has targeted 41% cost savings, with Valley leveraging its current infrastructure to take out costs.

The all-stock transaction is expected to have an immaterial impact to Valley’s sound capital metrics, even with goodwill that now comprises approximately 3.5% of total assets on a pro forma basis. Nonetheless, on a pro forma basis, the Company’s tangible common equity ratio remained relatively stable at 6.84%. Regulatory metrics were similarly affected.

Valley National Bancorp, a commercial bank headquartered in Wayne, New Jersey, had $19.0 billion in total assets at March 31, 2015.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2015), and DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found at http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Driscoll
Rating Committee Chair: Roger Lister
Initial Rating Date: 5 October 2009
Most Recent Rating Update: 9 May 2014

For additional information on this rating, please refer to the linking document under Related Research.