DBRS Confirms VLY at A (low) Following USAmeriBancorp Acquisition Announcement; Trend Remains Stable

DBRS, Inc. (DBRS) has today confirmed the ratings for Valley National Bancorp (Valley or the Company), including the Company’s Issuer & Senior Debt rating of A (low), which has been renamed to Long-Term Senior Debt (please see the rating nomenclature section). The trend for all ratings remains Stable. The ratings action follows the Company’s announcement to acquire Clearwater, Florida-based USAmeriBancorp, Inc. (USAB), a bank holding company with $4.4 billion in assets, in an all-stock transaction valued at approximately $816 million. Subject to approvals from regulators and other customary approvals, the transaction is expected to close in 1Q18.

DBRS’s confirmation is based on Valley’s proven track record of acquiring and successfully integrating acquisitions, including its recent acquisitions of Florida-based CNLBancshares, Inc. (CNLB, $1.4 billion in assets, completed on 12/1/15) and 1st United Bancorp, Inc. (1st United, $1.7 billion in assets, completed on 10/31/14). The confirmation also considers the Company’s new, albeit nominal, exposure to Alabama (pro-forma Alabama loans would represent 2% of the total loan portfolio), as well as the increase in Valley’s already high commercial real estate (CRE) concentration upon completion of the transaction. The Stable trend incorporates DBRS’s expectation that this acquisition will be integrated without significant issues and that Valley will be able to raise enough capital to at least maintain its capital metrics. DBRS would not view favorably any additional acquisitions until USAB has been fully integrated.

Notably, both the CNLB and 1st United acquisitions met or exceeded all original expectations when the deal was announced. The USAB deal would enhance Valley’s earnings generation capacity, providing further scale in Florida, particularly in the attractive Tampa Bay area market. Similar to its previous Florida-based acquisitions, Valley plans to introduce more robust product offerings, including residential mortgage and indirect auto. Management has targeted 28% cost savings, with Valley leveraging its current infrastructure to take out costs.

As noted following both the CNLB and 1st United acquisition announcements, DBRS remains wary of non-contiguous acquisitions, particularly in Florida where many banks have struggled historically, even with the apparent early success of CNLB and 1st United. Valley has stated that it would 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 would represent 25% of the total loan portfolio). With a fourth sizeable transaction since 2012, however, Valley must work even harder to ensure its strong corporate culture is fully embraced in its newer markets. Positively, technological advances have made managing and operating non-contiguous branches significantly easier and key USAB management will remain under contract, including the President and Chief Lending Officer, which should ensure a smoother transition.

Founded in 2007, USAB is a $4.4 billion in assets bank holding company that operates primarily in the Tampa-St. Petersburg-Clearwater, FL MSA ($3.0 billion of loans and $2.5 billion in deposits), and to a lesser degree in Alabama ($0.5 billion in loans and $1.1 billion in deposits), stemming from USAB’s acquisition of Aliant Financial Corporation (completed on 12/30/11), which bolstered its core deposit base. USAB’s loan portfolio largely consists of CRE, including a sizeable amount of construction loans. DBRS notes that asset quality metrics within USAB’s loan portfolio have remained favorable in recent periods, with an NPA / total assets ratio of 0.96% and net recoveries reported in 1Q17. On a pro-forma basis, Valley’s CRE exposure (including construction) would represent 42% of total loans, up from 38% as of 1Q17. This concentration, which would still be below Valley’s concentration threshold, is mitigated by Valley’s conservative credit culture that underpins the ratings and typically requires significant equity from borrowers. Further, Valley noted that it reviewed 75% of total outstanding loan balances, taking a credit mark of 1.75% of gross loans. In aggregate, USAB would comprise 15% of the Company’s total assets.

Following the announcement, Valley plans to issue $75 million of preferred stock in the coming days, as well as $75 million in common stock on an opportunistic basis sometime in the near-term, which would improve the Company’s already sound capital metrics.

Valley National Bancorp, a commercial bank headquartered in Wayne, New Jersey, had $23.4 billion in total assets at June 30, 2017.

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. Conversely, negative ratings pressure could result from continued below-peer profitability metrics or a significant deterioration in the Company’s superior risk profile.

RATING NOMENCLATURE
DBRS has renamed and assigned new ratings according to the table below.

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

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (May 2017), 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, Vice President – Global FIG
Rating Committee Chair: Lisa Kwasnowski, Senior Vice President – Global FIG
Initial Rating Date: 5 October 2009
Most Recent Rating Update: 18 May 2017

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.