DBRS Confirms VLY at A (low) Stable Trend

DBRS, Inc. (DBRS) has today confirmed all ratings of Valley National Bancorp (Valley, VLY 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 rating actions follow a detailed review of the Company’s operating results, financial fundamentals and future prospects.

Valley’s ratings are underpinned by its superior credit culture, which has consistently resulted in significantly lower-than-peer loan losses, allowing the Company to remain profitable every quarter since its founding in 1927. As such, preserving this corporate and credit culture over time is key to maintaining the rating. The ratings also reflect the demographically attractive markets in which the Company operates, including northern and central New Jersey, Manhattan, Brooklyn, Queens, Long Island and with the recent acquisitions of 1st United Bancorp (1st United) and CNLBancshares (CNL), Florida. Importantly and consistent with its successful history with acquisitions, Valley completed the full systems integration of CNL during 1Q16.

While recognizing the geographic diversity and appealing demographics associated with the expansion into Florida, DBRS remains wary of non-contiguous acquisitions, particularly in a marketplace that has historically been volatile. In addition, DBRS views Valley’s credit profile as being in the low end of its similarly-rated peer group. Consequently, DBRS does not expect Valley’s ratings to trend upward in the intermediate term. However, improved earnings and less reliance on spread income, as well as strong execution within Florida over the long term could have positive rating ramifications. Conversely, negative ratings pressure could result from continued below-peer profitability metrics or a significant deterioration in the Company’s superior risk profile.

Valley’s conservative underwriting has resulted in consistent profitability, but returns have lagged peers in recent periods, primarily due to the low interest rate environment, a highly competitive market for loans and slowdown in residential mortgage banking loan sales, which had been an outsized contributor to earnings a few years ago. Given its limited fee-based businesses, the Company continues to rely heavily on spread lending (88% of revenues in 2015), which remains a ratings constraint.

Expense control continues to be imperative to offset the challenging revenue environment, and as such, Valley remains focused on improving its operational efficiencies. Indeed, the Company’s branch rationalization initiative, which includes closing or consolidating 28 branches, remains on track, as Valley has closed 14 branches and expects to close the balance of the branches by the end of 2Q16. Moreover, the Company expects to reduce redundant costs associated with the CNL acquisition (closed on December 1, 2015), further reduce staffing levels and continue to utilize technology to enhance and streamline operations and delivery channels. Importantly, DBRS notes that while Valley’s earnings may not be as high during the boom times of a credit cycle, the Company tends to significantly outperform peers during times of stress, which supports the ratings.

Overall, Valley’s asset quality remains quite favorable, underpinned by its conservative credit culture. Indeed, non-accrual loans represented just 0.39% of total loans as of 1Q16 and the NCO ratio was a very low 0.04%. The Company’s allowance for loan losses represented 0.65% of total loans, which DBRS considers sufficient due to Valley’s long history of very low loan losses. Moreover, DBRS notes that Valley’s high concentration of commercial real estate (52% of total loans as of 1Q16) is mitigated by the Company’s stringent underwriting standards, which typically requires significant equity from borrowers.

DBRS views Valley’s capital levels, despite being lower than peers, as solid, given its strong track record of managing credit risk. Valley’s capital management continues to be shareholder-friendly, maintaining a high dividend payout ratio (79% in 1Q16), though the Company has not repurchased shares in recent years. Valley’s funding and liquidity profile remains satisfactory and should modestly improve as higher cost debt matures and/or is replaced with more efficient funding sources. Valley remains interested in strategic acquisitions at the right price and management has stated that eventually it would like to see its Florida operations represent up to a third of the company, which makes additional Florida-based acquisitions likely. DBRS will continue to carefully monitor the Company’s strategic progress.

Valley National Bancorp, a commercial bank headquartered in Wayne, New Jersey, had $21.7 billion in total assets at March 31, 2016.

RATING DRIVERS
In the intermediate term, ratings are unlikely to trend upward given recent expansion in Florida, which is a more volatile market. Longer term, improved earnings and less reliance on spread income, as well as strong execution within Florida, could have positive rating ramifications. Negative ratings pressure could result from continued below-peer profitability metrics or a significant deterioration in the Company’s superior risk profile.

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

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (December 2015), DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016), and DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), which can be found on our website under 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.

Lead Analyst: Michael McTamney
Rating Committee Chair: William Schwartz
Initial Rating Date: 5 October 2009
Most Recent Rating Update: 28 May 2015

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.