DBRS Comments on the Q3 2009 Earnings of Valley National Bancorp – Senior at A (low)

DBRS has today commented on the Q3 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 $31.6 million for the quarter, up from $15.0 million in the previous quarter and $3.6 million in Q3 2008. On a sequential quarter basis, net interest margin expansion, an incremental $21.6 million improvement due to the change in fair value of the Company’s junior subordinated debentures carried at fair value ($2.8 million non-cash charge compared to a $24.4 million non-cash charge in Q2 2009), lower other-than-temporarily impaired (OTTI) charges, and a modest decline in the provision for loan losses drove the improvement in earnings. Other highlights from the quarter include another $125 million partial repayment of TARP and a completed “at-the-market” common equity raise, which raised a total of $71.6 million in net proceeds. Overall, DBRS views the results as solid and anticipates that the Company will continue generating operating results and maintaining credit fundamentals expected of banks in its rating range.

While both nonperforming assets (NPAs) and net charge-offs (NCOs) increased during the quarter given the difficult operating environment, asset quality remains superior to most banking peers. In Q3 2009, three construction loans and two commercial real estate loans totaling $14.4 million went to non-accrual status and accounted for the vast majority of higher non-accruals. Specifically, NPAs reached a still low 0.87% of total loans, up from 0.69% in the second quarter. Meanwhile, NCOs increased almost $2 million during the quarter to an annualized 0.35% of average loans from 0.31% in the second quarter. Even with a modest decline in the provision and higher NCOs, provisions exceeded charge-offs by $2.7 million building the allowance for credit losses as a percentage of total loans to an adequate 1.10%. DBRS notes that $3 million of the provision was related to specific reserves related to one newly impaired commercial and industrial loan relationship. Overall, economic activity does appear to be picking up, but the economic recovery remains fragile. Sound underwriting should limit loss content within the loan portfolio limiting downside risk even if NPAs continue to increase going forward.

Positively, the Company’s net interest margin (NIM) continues to benefit from lower deposit costs and improved loan pricing. Compared to Q2 2009, the margin increased 9 basis points (bps) to 3.61%. The majority of the improvement came from lower deposit costs, but loan yields increased by 3 bps as well. This dynamic should continue in Q4 2009.

During the quarter, Valley opened another 4 de novo branches and has plans for 3 more de novos in Q4 2009. With the economic slowdown combined with the possibility of potential acquisitions, the Company plans to slow the rate of de novo branch openings going forward. On the acquisition front, Valley wants deals that would either fill in its current footprint or expand it into neighboring geographies. DBRS notes that the Company is not interested in FDIC-assisted deals outside of these desired areas.

The partial TARP repayment caused regulatory capital ratios to decline modestly. However, capital remains solid. The Company’s tangible common equity ratio improved to 6.23% from 5.64% during the quarter benefiting from the “at-the-market” capital raise, earnings and an improving other comprehensive loss position. Valley has made two partial repayments of TARP leaving $100 million still outstanding. Before fully repaying the preferred shares, management wants to be sure a real economic recovery is underway, which DBRS views as prudent.

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.