DBRS: VLY 2Q Results Solid with Positive Operating Leverage and Strong Loan Growth

Summary:
• Valley reported net income of $32.0 million, an improvement from 1Q driven by positive operating leverage that benefitted from strong loan growth and lower expenses.
• In May, Valley announced its intent to acquire CNLBancshares, Inc., a bank holding company headquartered in Orlando, Florida with approximately $1.4 billion in assets and 16 offices.
• 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) 2Q15 results as solid with the Company reporting robust loan growth, positive operating leverage and modest net interest margin expansion. While loan growth was strong and broad-based, the majority of loan growth came from the purchase of multi-family participations. Moreover, the loan growth has significantly outpaced deposit growth, pressuring the funding profile. Overall, the balance sheet remains sound and is supportive of the ratings.

In May, Valley announced its intent to acquire CNLBancshares, Inc., a bank holding company headquartered in Orlando, Florida with approximately $1.4 billion in assets and 16 offices. As noted following the 1st United acquisition announcement, Valley’s first foray into the Florida market, 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.

Total non-covered loans increased almost 6% sequentially, or a still solid 2.3% excluding the multi-family loan participations. With the exception of home equity, loan growth was broad-based. As a result of the strong loan growth and modest margin expansion, net interest income increased approximately 3% sequentially. Positively, the commercial loan pipeline remains solid. Although the Company expects modest margin pressure going forward, continued loan growth should contribute to higher net interest income going forward.

The strong loan growth demonstrated over the past several quarters has pressured funding. Indeed, loan balances now exceed total deposits. Valley is running some promotional pricing to address this, which will add to margin pressure.

Expenses declined sequentially driven by realized expense savings from the February 1st United conversion, as well as the higher seasonal expenses incurred in 1Q. Further looking to reduce expenses, Valley announced that it is pursuing a plan to close and consolidate 13 branches in 2H15 with associated costs expected to be immaterial. The closures should allow Valley to reduce operating expenses by $4.3 million per year once completed.

Credit remains sound with declines in delinquencies and nonperforming assets. Net charge-offs did increase, but remain very manageable.

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.