DBRS Comments on Valley National Bancorp’s 4Q11 Earnings – Senior at A (low)
DBRS, Inc. (DBRS) has today commented on the 4Q11 earnings of Valley National Bancorp (Valley or the Company). DBRS rates the Company’s Issuer & Senior Debt at A (low) with a Stable trend. Valley reported net income of $24.8 million for the quarter, down from $35.4 million in the previous quarter and from $38.2 million in 4Q10. Unusual items in the quarter included net securities gains of $12.0 million, a $19.1 million non-cash other-than-temporary impairment (OTTI) charge, and $2.3 million of merger-related expenses.
Effective January 1, 2012, the Company completed its acquisition of State Bancorp, Inc. (State), a bank with approximately $1.6 billion in assets and 16 branches located in Nassau, Suffolk, Queens and Manhattan. Valley expects to complete the systems integration in the latter half of 1Q12 and management noted that they now expect to exceed their cost savings target of 25%. Building Valley’s presence in Long Island and the New York metro area remains a priority for the Company. To be closer to its expanding franchise, Valley is opening an executive office in Manhattan where senior management will spend some of their time going forward.
During the quarter, asset quality did deteriorate with three commercial credits transitioning to non-accrual status, totaling an aggregate $22.5 million. Nonperforming assets were also negatively impacted by the addition of non-accrual debt securities of $27.2 million. Overall, non-covered NPAs increased $44.8 million during the fourth quarter, representing a still sound 1.68% of total loans and NPAs from 1.26% in 3Q11. The OTTI charge was primarily related to trust preferred securities issued by one bank holding company, which has been deferring interest payments on these securities since late 2009 under an operating agreement with regulators. Following the impairment charge, these securities had a combined adjusted amortized cost of $46.4 million and a fair value of $23.5 million. Management indicated that the charge was driven by a delay in expectations on the timing of receiving payments, not a deterioration in performance by the bank in question.
Meanwhile, net charge-offs (NCOs) increased $9.6 million to $14.5 million, or 0.59% of average loans, primarily driven by $6.5 million in charge-offs related to two of the three new commercial non-accrual loans. Positively, early stage delinquencies are at their lowest levels since before the outset of the financial crisis in 2008 and stringent underwriting standards remains a hallmark of the Company. Of note, Valley has never reported a quarterly loss in its 84 year history.
Loan demand picked up during the quarter with the Company exhibiting material loan growth in both residential mortgage and commercial real estate lending. Moreover, excluding a $37 million loan made to State to repay its TARP shares, commercial and industrial loans increased modestly as well. DBRS notes that the State loan was subsequently eliminated following the closing date of the merger. Overall, Valley’s loan portfolio grew 6.8% (annualized) during the quarter, even excluding the State loan. Positively, loan demand in January has gotten off to a solid start, which should lead to continued loan growth, especially as Valley introduces new products to its newly acquired State branches. Valley noted that most of the loan growth has come from taking market share away from other banks, not current clients taking risk to expand operations.
Despite loan growth, net interest income declined $3.6 million to $118.3 million during the quarter, as the continued low rate environment caused the margin to contract 12 basis points to 3.74%. Moreover, securities sales also pressured the margin in the quarter, which should remain pressured over the intermediate term.
During the fourth quarter, Valley modified the terms of $435 million in FHLB advances. Additionally, Valley modified another $150 million in FHLB advances in January 2012. DBRS notes that the Company did not incur any prepayment penalties or fees and was able to lower its weighted average cost by 86 basis points to 3.99%. The borrowings all have ten year maturities. Valley expects to save $5.1 million annually from all the modifications. With balance sheet growth, the Company’s tangible common equity to tangible assets ratio declined to 6.67% from 6.96% in 3Q11. The State acquisition is expected to modestly lower capital metrics when 1Q12 results are reported.
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. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.
The sources of information used for this rating include company documents, the Federal Reserve, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.
Lead Analyst: Michael Driscoll
Approver: Roger Lister
Initial Rating Date: 5 October 2009
Most Recent Rating Update: 20 December 2011
For additional information on this rating, please refer to the linking document under Related Research.
For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.