DBRS Initiates Coverage of Valley National Bancorp – Issuer & Senior Debt at A (low)

DBRS has today initiated coverage of Valley National Bancorp (Valley or the Company). DBRS has assigned a rating of A (low) to Valley National Bancorp’s Issuer & Senior Debt and a rating of “A” to the Deposits & Senior Debt of Valley National Bank, Valley’s primary banking subsidiary. Both Valley National Bancorp and Valley National Bank have been assigned Short-Term ratings of R-1 (low). The trend on all ratings is Stable.

Headquartered in Wayne, New Jersey, Valley is the largest commercial bank based in the state of New Jersey. The Company operates a network of almost 200 branches primarily across the Northern NJ counties of Bergen, Passaic, Essex, Hudson and Morris. In recent years, the Company’s expansion plans have included de novo growth in New York City (Manhattan, Brooklyn and Queens). At June 30, 2009, Valley had total assets of $14.1 billion, gross loans of $9.6 billion and deposits of $9.3 billion.

Valley’s ratings are underpinned by the Company’s strong asset quality, which DBRS sees as reflective of the Company’s disciplined underwriting. At June 30, 2009, non-performing assets represented just 0.92% of gross loans plus OREO, a level superior to most similarly rated peers. For Q2 2009, net charge-offs totaled $8.2 million or 0.34% of average loans, up 5 bps from Q1 2009 and an increase of just 12 bps from Q2 2008. In underwriting credits, especially CRE which at 36% is the Company’s largest loan category, Valley focuses on cash flow as well as collateral values, equity and personal guarantees all of which help to minimize loss content. In recent periods, resilient asset quality has allowed Valley to absorb costs related to its investment portfolio, including marks taken on Fannie and Freddie preferred stock as well as impairments on bank trust preferred securities and private label MBS.

Valley also benefits from its solid franchise in what is one of the more demographically attractive areas in the Country. Though not a high growth market, the Company’s northern New Jersey footprint is densely populated and has a large and diverse economy with better than national average income and employment trends. The Company’s attractive demographics and the lack of speculative development or subprime lending seen in the latest real estate boom cycle has also lent a degree of support to collateral values as the cycle has turned. Of course, this market is also highly competitive with many large national banks as well as domestic subsidiaries of large foreign banks having significant presences in the region. Valley’s performance is also inextricably tied to the fortunes of the local economy. With all but three branches located in the New York-Northern New Jersey-Long Island, NY-NJ-PA MSA, the Company lacks the geographic diversity of higher-rated institutions.

In DBRS’s view, Valley’s ratings are also constrained by a relative lack of diversity in its revenue sources. Net interest income makes up the large majority of the Company’s revenues. As seen in the fourth quarter of 2008 and into the first quarter 2009, changes in market interest rates can add volatility to the Company’s margins. Positively, Valley was able to stabilize NIM in a relatively short period. Nevertheless, DBRS notes that an increase in the contribution of fee revenue to total revenue would be viewed positively as these revenues are less sensitive to interest rate cycles.

DBRS sees Valley’s capital and liquidity as sound. Considering the Company’s risk profile, Valley’s capital levels, including a Tier 1 ratio of 11.09% at June 30, are adequate. The Company maintains a tangible common equity to risk-weighted asset ratio in excess of 7%, which compares favorably to peers. Though wholesale funding has been somewhat elevated, Valley’s reliance is expected to decline as short-term borrowings are paid down and higher cost time deposits roll off. Enabling this reduction are reduced loan demand, the shrinking of the Company’s auto portfolio and its decision to sell almost all mortgage originations to Fannie and Freddie. For the second quarter of 2009, core deposits represented 83% of loans. Despite the noted charges in recent quarters related to some securities, DBRS views Valley’s investment portfolio, 88% of which is rated “A” or better, as another source of liquidity. The Company also relies on FHLB borrowings and has collateral eligible for posting for liquidity from various Federal Reserve facilities.

In the second quarter, Valley reported a small profit of $15.0 million compared to net income of $37.4 million in Q1 2009 and net income of $41.5 million in Q2 2008. Results were hurt by a non-cash charge related to the change in the value of the junior subordinated debt related to the Company’s outstanding trust preferred securities as well as the industry-wide FDIC special assessment. DBRS expects earnings to remain challenged for the remained of the year.

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.