DBRS Comments on Valley National Bancorp’s Q4 2009 Earnings– Senior at A (low)

DBRS has today commented on the Q4 2009 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 $32.1 million for the quarter, up from $31.6 million in the previous quarter and $16.9 million in Q4 2008. On a sequential quarter basis, net securities gains of $7.8 million more than offset declines in net interest income and higher expenses. Net interest income was negatively impacted by net interest margin (NIM) compression of 14 basis points (bps) to 3.47% as asset yields contracted more rapidly than funding costs. Other highlights of the quarter include the complete repayment of TARP, another common equity raise and strong core deposit growth (excluding higher cost time deposits). DBRS notes that asset quality remains on very solid footing, which bodes well for the current rating level.

Asset quality metrics remain strong. Nonperforming assets (NPAs) increased during the quarter to $98.4 million, or 1.05% of total loans, from $82.8 million, or 0.87% in the third quarter. The increase was almost entirely from several commercial real estate and residential mortgage loans that were previously classified as 90 days or more past due and still accruing. As a result, early stage delinquencies were down, which should lead to lower NPA levels later in 2010. While there are legitimate concerns regarding commercial real estate (CRE) loans for the banking industry as a whole, Valley’s CRE portfolio remains very conservatively underwritten and is not currently a rating concern. Indeed, delinquencies were down modestly from Q3 2009 levels to below 1%. Meanwhile, net charge-offs (NCOs) increased $3.6 million to $13.6 million, or 0.58% of average loans (annualized). Charge-offs included $4.4 million of collateral dependent impaired loans that were partially covered by a specific reserve. As a result, NCOs did exceed provisions for credit losses by $1.4 million. Positively, a large number of loans were upgraded in classification pointing to an improving environment. DBRS views Valley’s allowance for credit losses of 1.11% as sufficient, especially considering the Company’s superior credit culture.

NIM was negatively impacted by higher yielding securities paying down, and to a lesser extent, the loan portfolio contracting. These assets have been replaced by short duration low yielding securities. While this strategy will hurt earnings in the short term, it positions the Company to take advantage of increased loan demand when the economy regains its footing as well as reducing risk on the balance sheet.

Positively, Valley repaid the remaining $100 million in TARP funds and raised another $63.7 million in net proceeds through a direct offering of common equity during the quarter. As a result, the tangible common equity ratio increased another 45 bps to a solid 6.68%. This capital cushion positions the Company well for loan growth and/or potential M&A transactions. Management indicated that no deals were imminent, but does expect opportunities to surface over the next twelve months.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.