Valley National Bancorp Reports Increase in Third Quarter Earnings, Net Interest Margin Growth and Stable Asset Quality

WAYNE, N.J., Oct. 21 /PRNewswire-FirstCall/ -- Valley National Bancorp (NYSE: VLY), the holding company for Valley National Bank, today reported net income for the third quarter of 2010 of $32.6 million, $0.20 per diluted common share, as compared to the third quarter of 2009 earnings of $25.6 million, after $6.0 million in dividends and accretion on Valley preferred stock, or $0.17 per diluted common share.

Gerald H. Lipkin, Chairman, President and CEO commented that, “During the third quarter, we continued to combat a slow-growth, low-rate environment that has impacted new loan demand.  In the face of these challenges, we were able to produce strong third quarter 2010 results and expand our net interest margin, while increasing our allowance for credit losses as a percentage of loans. Although our non-accrual loans modestly increased during the quarter, Valley’s overall credit quality, a hallmark of our institution, remains both stable and better than many of our competitors.”  

Third Quarter 2010 Performance Highlights

• Increased Net Interest Margin: Net interest margin on a tax equivalent basis was 3.78 percent in the third quarter of 2010 versus 3.72 percent in the second quarter of 2010 and 3.61 percent in the third quarter of 2009.

• Stable Asset Quality: Total loans past due 30 days or more on our entire loan portfolio of $9.4 billion were 1.70 percent at September 30, 2010 compared to 1.71 percent at June 30, 2010. Our commercial real estate loan portfolio had loans past due 30 days or more totaling 1.13 percent at September 30, 2010 as compared to 1.12 percent at June 30, 2010. The residential mortgage and home equity loan portfolios totaling nearly 22,000 individual loans had only 248 loans past due 30 days or more at September 30, 2010.  At September 30, 2010, the residential mortgage and home equity loan delinquencies totaled $44.5 million, or 1.84 percent of $2.4 billion in total loans within these categories. See “Credit Quality” section below for more details.

• Lower Provision for Credit Losses: The provision for credit losses totaled $9.3 million for the third quarter of 2010 as compared to $12.4 million for the second quarter of 2010 and $12.7 million for the third quarter of 2009. Net loan charge-offs were $3.2 million lower than the provision for credit losses during the third quarter of 2010.  Net loan charge-offs increased $880 thousand from the second quarter of 2010 mainly due to a lower level of loan recoveries. At September 30, 2010, our allowance for credit losses as a percentage of non-covered loans was 1.28 percent as compared to 1.24 percent at June 30, 2010.

• Strong Commercial Loan Growth in a Difficult Lending Environment: Commercial and Industrial loans increased $63.9 million, or 14.5 percent on an annualized basis during the third quarter of 2010 from the second quarter of 2010 mainly due to higher line of credit usage by our existing customers in our New York metropolitan markets. Overall, total loans remained unchanged at $9.4 billion at September 30, 2010 compared to June 30, 2010.

• Residential Mortgage Loan Activity: We originated over $280 million in new and refinanced residential mortgage loans during the three months ended September 30, 2010.  Our residential volumes increased as compared to the second quarter of 2010 due to the continued low level of interest rates and our very successful $499 refinance program.  Additionally, we transferred $83 million in conforming residential mortgage loans to loans held for sale during the third quarter of 2010 upon management’s decision to sell such loans to Fannie Mae.  Management believes these loans with 15 and 20 year fixed terms and an aggregate weighted average interest rate of 5.22 percent are likely to refinance in the near term due to the current low interest rate environment. The sale closed in October 2010 and resulted in a pre-tax gain of approximately $3.9 million which will be recognized in the fourth quarter of 2010.  

• Investments: No impairment charges were recognized on securities in earnings during the third quarter of 2010, as compared to $2.0 million in the second quarter of 2010 and $743 thousand during the third quarter of 2009.  

• Trading Mark to Market Impact on Earnings: Net income for the third quarter of 2010 included net trading losses totaling $2.6 million ($0.01 per common share).  These trading losses consisted of $2.1 million and $517 thousand in non-cash mark to market losses on our junior subordinated (“trust preferred”) debentures carried at fair value, and the fair value of our trading securities portfolio, respectively. The third quarter of 2009 included net trading losses of $3.5 million ($0.01 per common share) mainly due to change in market value of the trust preferred debentures.

Net Interest Income and Margin

Net interest income on a tax equivalent basis was $119.2 million for the third quarter of 2010, a $786 thousand increase from the second quarter of 2010 and an increase of $2.8 million from the third quarter of 2009. The linked quarter increase was primarily due to lower interest expense caused by maturing high cost time deposits and higher interest income from loans caused, in part, by discount accretion recognized on pooled loans acquired in the FDIC-assisted acquisitions of LibertyPointe Bank and The Park Avenue Bank in the first quarter of 2010, partially offset by lower rates on taxable investments purchased and a decline in average loans during the third quarter of 2010.

The net interest margin on a tax equivalent basis was 3.78 percent for the third quarter of 2010, an increase of 17 basis points from the third quarter of 2009, and an increase of 6 basis points from 3.72 percent for the linked quarter ended June 30, 2010. The yield on average interest earning assets increased by 4 basis points on a linked quarter basis mainly due to a 10 basis point increase in the yield on average loans resulting mainly from accretion recognized on pooled loans, partially offset by a 21 basis point decline in taxable investments as principal paydowns and interest on higher yielding investments are reinvested primarily in lower yielding securities and non-taxable investments. The cost of average interest bearing liabilities declined three basis points from the second quarter of 2010 mainly due to a three basis point decrease in the cost of average time deposits caused by run-off of higher cost deposits, and a two basis point decline in the cost of average savings, NOW, and money market accounts resulting mostly from a change in the mix of the balances outstanding in these products. Our cost of total deposits was 0.76 percent for the third quarter of 2010 compared to 0.81 percent for the three months ended June 30, 2010.  

Credit Quality

Total loan delinquencies as a percent of total loans were 1.70 percent at September 30, 2010 as compared to 1.71 percent at June 30, 2010 and 1.60 percent at September 30, 2009.  With a loan portfolio totaling approximately $9.4 billion, net loan charge-offs for the third quarter of 2010 were $6.1 million compared to $5.2 million for the second quarter of 2010, and $10.0 million for the third quarter of 2009.

The following table summarizes the allocation of the allowance for credit losses to specific loan categories and the allocation as a percentage of each loan category at September 30, 2010, June 30, 2010 and December 31, 2009:

Total non-performing assets (“NPAs”), consisting of non-accrual loans, other real estate owned (OREO) and other repossessed assets, totaled $112.1 million, or 1.18 percent of loans and NPAs at September 30, 2010 compared to $109.8 million, or 1.15 percent of loans and NPAs at June 30, 2010.  The increase was mainly due to non-accrual loans which increased to $105.6 million at September 30, 2010 as compared to $103.5 million at June 30, 2010. Although the timing of collection is uncertain, management believes most of the non-accrual loans are well secured and largely collectible based on, in part, our quarterly review of impaired loans. Our impaired loans, mainly consisting of non-accrual and troubled debt restructured commercial and commercial real estate loans, totaled $115.3 million at September 30, 2010 and had $14.0 million in related specific reserves included in our total allowance for loan losses. OREO and other repossessed assets, excluding OREO subject to loss-sharing agreements with the FDIC, totaled a combined $6.5 million at September 30, 2010 as compared to $6.3 million at June 30, 2010.

Loans past due 90 days or more and still accruing decreased to $4.4 million, or 0.05 percent of total loans at September 30, 2010 compared to $6.1 million, or 0.06 percent at June 30, 2010 primarily due to a $1.5 million decrease in construction loans within this delinquency category.  

Troubled debt restructured loans, with modified terms and not reported as loans 90 days or more past due and still accruing or non-accrual, are restructured loans to customers experiencing financial difficulties where a concession has been granted.  All loan modifications are made on a case-by-case basis.  However, we typically lower the monthly payments on such loans through either a reduction in interest rate, an extension of the maturity date, or a combination of these two methods.  At September 30, 2010, accruing troubled debt restructured loans, that are performing in accordance with their modified terms, consisted of 17 loans (primarily in the commercial and industrial loan and mortgage loan portfolios) totaling $48.2 million as compared to the same 17 loans totaling $48.0 million at June 30, 2010.  On an aggregate basis, the $48.2 million in restructured loans at September 30, 2010 had a weighted average modified interest rate of approximately 4.6 percent.

Loans and Deposits

Total loans remained unchanged at $9.4 billion at September 30, 2010 as compared to June 30, 2010 despite the transfer of approximately $83 million in residential mortgage loans to loans held for sale during the third quarter of 2010.

Non-Covered Loans. Non-covered loans are loans not subject to loss-sharing agreements with the FDIC.  Non-covered loans increased $9.0 million to approximately $9.1 billion at September 30, 2010 from June 30, 2010.  The linked quarter increase was mainly comprised of increases in commercial and industrial, and automobile loans of $63.9 million and $11.0 million, respectively, partially offset by decreases of $38.1 million, $21.0 million, and $14.4 million in commercial real estate, residential mortgage, and home equity, respectively. The commercial and industrial loan portfolio increased by approximately 14.5 percent during the third quarter of 2010 mainly due to an increase in loan demand from our New York City customers, including higher existing line of credit usage by customers.  Automobile loans increased mainly due to the purchase of approximately $37 million in prime indirect auto loans during the third quarter of 2010.  Commercial real estate loans continued to decline during 2010 due to the economic conditions and a lack of new quality loan opportunities. Home equity loans declined quarter over quarter as many borrowers continue to refinance their first mortgages at historically low rates and roll home equity balances into the new mortgage and customer line usage declined over concerns about the economy.

Covered Loans. Loans for which Valley National Bank will share losses with the FDIC are referred to as “covered loans,” and consist of loans acquired from LibertyPointe Bank and The Park Avenue Bank as a part of FDIC-assisted transactions during the first quarter of 2010.  Our covered loans consist primarily of commercial real estate loans and commercial and industrial loans and totaled $377.0 million at September 30, 2010 as compared to $385.3 million at June 30, 2010. These loans are accounted for on a pool basis, and the pools are considered to be performing loans.

We may experience declines in the loan portfolio during the remainder of 2010 and beyond due to a slow economic recovery cycle, increased competition for quality borrowers, or a change in asset/liability management strategy.

Deposits. Total deposits decreased $151.7 million to approximately $9.3 billion at September 30, 2010 from June 30, 2010 as we continue to keep interest rates low on most interest bearing deposit products in response to the low level of loan demand caused by the economy. During the quarter ended September 30, 2010, time deposits declined $211.0 million due to run-off of higher cost maturing certificates of deposit.  However, savings, NOW, and money market deposits increased $66.8 million as compared to June 30, 2010 largely due to higher municipal deposit balances.

Non-Interest Income

Third quarter of 2010 compared with third quarter of 2009

Non-interest income totaled $17.3 million for the three months ended September 30, 2010 and remained relatively unchanged from the same period one year ago. However, net gains on sales of loans decreased $1.1 million to $1.5 million for the quarter ended September 30, 2010 mainly due to lower sales volume during the quarter. Net impairment losses on securities decreased $743 thousand as compared to the third quarter of 2009 as no credit impairment losses on securities were recognized during the quarter ended September 30, 2010.

Third quarter of 2010 compared with second quarter of 2010

Non-interest income decreased $5.1 million or 22.9 percent to $17.3 million for the quarter ended September 30, 2010 from $22.5 million for the linked quarter.  Net gains on securities transactions decreased $3.5 million to $112 thousand in the third quarter, primarily due to the gain recognized on the sale of $73.9 million in U.S. Treasury securities during the second quarter of 2010. Net trading losses increased $3.5 million to $2.6 million from a net trading gain of $838 thousand in the second quarter of 2010.  The decrease in net trading gains was mainly due to the negative impact of the change in the fair value of our junior subordinated debentures carried at fair value as compared to the linked quarter. The above decreases were partially offset by a $2.0 million decline in net impairment losses on securities as compared to the second quarter of 2010 as no credit impairment losses on securities were recognized during the quarter ended September 30, 2010.

Non-Interest Expense

Third quarter of 2010 compared with third quarter of 2009

Non-interest expense increased $5.1 million or 6.84 percent to $78.9 million for the quarter ended September 30, 2010 from $73.8 million for the same quarter of 2009.  Salary and employee benefits expense, and net occupancy and equipment expense increased $3.1 million and $789 thousand, respectively, in part, due to additional expenses related to the FDIC-assisted transactions in March 2010, as well as from de novo branch openings over the twelve month period ended September 30, 2010. Amortization of other intangible assets increased $892 thousand as compared to the quarter ended September 30, 2009 mainly due to $150 thousand of additional amortization expense related to core deposit intangibles acquired in the FDIC-assisted transactions in March 2010 and the recognition of a $810 thousand impairment charge on certain loan servicing rights in the third quarter of 2010 as compared to a $32 thousand recovery during the third quarter of 2009. Professional and legal fees increased $404 thousand due to general increases caused by the FDIC-assisted transactions and other corporate matters.

Third quarter of 2010 compared with second quarter of 2010

Non-interest expense decreased by $1.0 million from $79.9 million for the linked quarter ended June 30, 2010, mainly due to a decrease in net occupancy and equipment expense of $847 thousand.  This decline was primarily due to a full quarter of expense reductions related to the closure of five of seven branches acquired in FDIC-assisted transactions in the second quarter of 2010.

Income Tax Expense

Income tax expense was $14.2 million and $14.0 million for the third quarter of 2010 and 2009, respectively.  The effective tax rate for both periods was relatively unchanged at 30.3 percent for the three months ended September 30, 2010 compared to 30.6 percent for the same period of 2009.  

Income tax expense was $40.4 million and $36.7 million for the nine months ended September 30, 2010 and 2009, respectively.  However, the effective tax rate for both periods was relatively unchanged at 30.3 percent for the nine months ended September 30, 2010 compared to 30.4 percent for the same period of 2009.  For the remainder of 2010, we anticipate that our effective tax rate will approximate 30 percent.  

About Valley

Valley is a regional bank holding company with over $14 billion in assets, headquartered in Wayne, New Jersey. Its principal subsidiary, Valley National Bank, currently operates 200 branches in 135 communities serving 14 counties throughout northern and central New Jersey, Manhattan, Brooklyn and Queens. Valley National Bank is the largest commercial bank headquartered in New Jersey and is committed to providing the most convenient service, the latest in product innovations and an experienced and knowledgeable staff with a high priority on friendly customer service 24 hours a day, 7 days a week. Valley National Bank offers a wide range of deposit products, mortgage loans and cash management services to consumers and businesses including products tailored for the medical, insurance and leasing business. Valley National Bank’s comprehensive delivery channels enable customers to bank in person, by telephone or online.

For more information about Valley National Bank and its products and services, please visit www.valleynationalbank.com or call Customer Service 24/7 at 1-800-522-4100.

Forward Looking Statements

The foregoing contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations. These statements may be identified by such forward-looking terminology as “should,” “expect,” “believe,” “view,” “opportunity,” “allow,” “continues,” “reflects,” “typically,” “usually,” “anticipate,” or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties. Actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to:

• a continued or unexpected decline in the economy, in particular in New Jersey and the New York Metropolitan area;
• higher than expected increases in our allowance for loan losses;
• higher than expected increases in loan losses or in the level of nonperforming loans;
• unexpected changes in interest rates;
• a continued or unexpected decline in real estate values within our market areas;
• declines in value in our investment portfolio;
• charges against earnings related to the change in fair value of our junior subordinated debentures;
• higher than expected FDIC insurance assessments;
• the failure of other financial institutions with whom we have trading, clearing, counterparty and other financial relationships;
• lack of liquidity to fund our various cash obligations;
• unanticipated reduction in our deposit base;  
• potential acquisitions may disrupt our business;
• legislative and regulatory actions (including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulations) subject us to additional regulatory oversight which may result in increased compliance costs and/or require us to change our business model;
• changes in accounting policies or accounting standards;
• we may be unable to adapt to technological changes;
• our internal controls and procedures may not be adequate to prevent losses;
• claims and litigation pertaining to fiduciary responsibility, environmental laws and other matters;
• the possibility that the expected benefits of the LibertyPointe Bank and The Park Avenue Bank acquisitions will not be fully realized;
• expected cost synergies and other benefits from our acquisition activities might not be realized within the anticipated time frames or at all, and costs or difficulties relating to integration matters may arise; and
• other unexpected material adverse changes in our operations or earnings.

A detailed discussion of these and other factors that could affect our results is included in our SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 and our Annual Report on Form 10-K for the year ended December 31, 2009.  We undertake no duty to update any forward-looking statement to conform the statement to actual results or changes in our expectations.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. 

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