WAYNE, N.J., July 23 /PRNewswire-FirstCall/ -- Valley National Bancorp (NYSE: VLY), the holding company for Valley National Bank, today reported net income for second quarter of $15.0 million, $0.06 per diluted common share, compared to second quarter of 2008 earnings of $41.5 million, or $0.31 per diluted common share. Diluted earnings per common share were impacted by a $24.4 million ($0.11 per common share) non-cash charge due to the change in the fair value of junior subordinated debentures carried at fair value, a $6.5 million ($0.03 per common share) industry-wide FDIC special assessment, and accrued preferred stock dividends and accretion totaling $5.8 million ($0.04 per common share) for the second quarter of 2009. All common per share data presented was adjusted to reflect the stock dividend issued on May 22, 2009.
The following performance highlights and significant events occurred during the second quarter of 2009:
- The net interest margin on a fully tax equivalent basis increased by 17 basis points to 3.52 percent mainly due to a $3.6 million increase in net interest income on a fully tax equivalent basis. Net interest income improved over the linked quarter as our cost of funds declined $5.8 million. See "Net Interest Income and Margin" section below for more details.
- Total loans past due 30 days or more on our entire loan portfolio of $9.6 billion were 1.49 percent at June 30, 2009 compared to 1.34 percent at March 31, 2009. Our commercial mortgage portfolio had loans past due 30 days or more totaling 1.24 percent at June 30, 2009 compared to 1.35 percent at March 31, 2009.
- At June 30, 2009, our home equity and residential mortgage loan portfolios totaling approximately 23,000 individual loans had only 134 loans past due 30 days or more compared to 123 loans at March 31, 2009. These delinquencies totaled $31.3 million, or 1.18 percent of $2.6 billion in total home equity and residential mortgage loans at June 30, 2009. See "Credit Quality" section below for more details.
- On June 3, 2009, we repurchased from the U.S. Department of the Treasury 75,000 out of the 300,000 shares of our Series A Fixed Rate Cumulative Perpetual Preferred Stock that were issued to the Treasury on November 14, 2008 under the Capital Purchase Program. The aggregate purchase price for the repurchased preferred shares was approximately $75.2 million (including accrued and unpaid dividends) and resulted in an accelerated accretion charge of $1.9 million to retained earnings in the second quarter of 2009 based on the difference between the par value of $75 million and the carrying value of $73.1 million.
- Our regulatory capital ratios continue to reflect Valley's strong capital position. The Company's total risk-based capital, Tier I capital, and leverage capital were 12.94 percent, 11.09 percent, and 8.74 percent, respectively at June 30, 2009.
- Valley extended over $450 million in new credit to quality existing and new customers during the second quarter. However, the overall loan portfolio declined 8.9 percent on an annualized basis mainly due to management's decision to sell most refinanced and new residential mortgage loan originations in the secondary market, as well as continued declines in our automobile portfolio caused by the lack of consumer demand and our high underwriting standards.
- Valley engaged in minimal trading activities during the period. Net income included net trading losses of $18.6 million for the second quarter of 2009 mainly consisting of a $24.4 million non-cash charge on the change in the fair value of the junior subordinated debentures carried at fair value, partially offset by $4.2 million in mark to market gains on the fair value of trading securities and $1.6 million in realized gains on sales of trading securities. As of June 30, 2009, the junior subordinated debentures carried at fair value had a carrying value of $150.7 million and an unpaid contractual principal balance of $157.0 million.
- We accrued and expensed a $6.5 million FDIC special assessment equal to 5 basis points of our total assets minus Tier 1 capital as of June 30, 2009. The FDIC indicated an additional special assessment in 2009 is probable, but the amount is uncertain at this time.
- Valley recorded other-than-temporary impairment charges totaling $2.4 million ($1.5 million after taxes) for estimated credit losses on four private label mortgage backed securities classified as available for sale during the second quarter of 2009. After the write downs, these four securities had a combined book value and carrying value of $46.9 million and $41.6 million, respectively, at June 30, 2009.
- On June 8, 2009, we entered into an equity distribution agreement to sell from time to time up to 5.67 million shares of our no par value common stock. Under the agreement, we issued approximately 43 thousand shares at a weighted average price of $12.29 during June 2009. From June 8, 2009 to June 30, 2009, Valley's common stock traded at prices between $12.64 and $10.81 as reported by the New York Stock Exchange.
- Effective June 26, 2009, Valley's Dividend Reinvestment Plan was enhanced to allow our common stockholders to purchase additional shares of Valley National Bancorp common stock utilizing optional cash payments up to $100,000 per quarter, in addition to the reinvestment of all or part of their cash dividends. Shares purchased under this plan will be issued directly from Valley or in open market transactions as directed by Valley. No new common shares were issued under this plan during the second quarter of 2009.
Chairman's Comments
Gerald H. Lipkin, Chairman, President and CEO noted that, "The recession continues to impact our economy and all entities, especially financial institutions. Mindful of these conditions, management is pleased with Valley's operating performance and the level of loan delinquencies which remain below most of our peers. As reflected in our net interest income and margin, we continue to manage our marginal cost of funds with a similar discipline used in managing our loan portfolio. Excluding the non-cash charge of $24.4 million and the $6.5 million FDIC special assessment charge our net income was good given the current operating conditions.
Total delinquencies 30 days or more past due for the entire loan portfolio were 1.49 percent, of which only 0.80 percent are greater than 90 days past due or non-accrual loans. Delinquencies on our commercial mortgage portfolio remain well controlled mainly due to our underwriting standards which typically require a combination of strong cash flow, substantial down payment, and personal guarantees.
Despite our acceptable loan performance to date, we recorded a $13.1 million provision for credit losses during the quarter, approximately $4.8 million greater than net charge-offs. The addition to our reserves was, among other things, to provide for the potential risk of loan deterioration resulting from a continued downturn in the U.S. economy. The allowance for credit losses as a percentage of total loans increased 7 basis points to 1.06 percent at June 30, 2009 as compared to March 31, 2009 and increased 22 basis points compared to June 30, 2008.
During the second quarter we repurchased 25 percent of our preferred shares issued to the Treasury after careful analysis of the results from our stress test on Valley's balance sheet and earnings. This reduction in our preferred shares should increase net income available to our common stockholders in future periods as preferred dividends will decline. Management will continue to assess the changes in the economic environment, Valley's credit risk, capital position, and other factors prior to any future redemption requests.
We continue to serve our customers, our communities and our stockholders during these difficult times. We believe our commitment to quality loans and consistent underwriting standards should allow us to prevail as the economy continues to work through the recession."
Credit Quality
Given the state of the U.S. economy and the current level of our loan delinquencies and losses relative to our peers, management believes that our credit quality remains good. Our focus has been and continues to be on traditional lending, utilizing our time-tested underwriting approach. With a loan portfolio totaling approximately $9.6 billion, net loan charge-offs for the second quarter of 2009 were $8.2 million compared to $7.2 million for the first quarter of 2009, and $4.9 million for the second quarter of 2008.
Valley's allocated reserves for the commercial loan portfolio increased $5.9 million or 39 basis points as a percentage of the portfolio during the period due to increases in reserves for non-accrual loans and other factors identified by management. 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:
June 30, 2009 March 31, 2009 June 30, 2008
------------- -------------- -------------
Allocation Allocation Allocation
as a % as a % as a %
of of of
Allowance loan Allowance loan Allowance loan
Allocation category Allocation category Allocation category
---------- -------- ---------- -------- ---------- --------
Loan category:
Commercial* $53,721 2.92% $47,796 2.53% $35,330 2.10%
Mortgage:
Construction 14,856 3.10% 15,621 3.10% 11,676 2.92%
Residential
mortgage 4,911 0.24% 4,750 0.22% 3,364 0.15%
Commercial
mortgage 10,398 0.31% 9,824 0.29% 10,177 0.40%
------ ----- ------
Total mortgage
loans 30,165 0.51% 30,195 0.50% 25,217 0.49%
Consumer:
Home equity 1,686 0.29% 1,702 0.28% 1,549 0.29%
Other
consumer 10,721 0.86% 11,419 0.86% 10,041 0.61%
------ ------ ------
Total consumer
loans 12,407 0.67% 13,121 0.68% 11,590 0.53%
Unallocated 6,024 NA 6,365 NA 3,812 NA
----- ----- -----
$102,317 1.06% $97,477 0.99% $75,949 0.84%
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* Includes the reserve for unfunded letters of credit.
Total non-performing assets, consisting of non-accrual loans, other real estate owned (OREO) and other repossessed assets, totaled $66.4 million, or 0.69 percent of loans at June 30, 2009 compared to $57.0 million, or 0.58 percent of loans at March 31, 2009. Non-accrual loans increased $10.3 million at June 30, 2009 as compared to March 31, 2009, while OREO and other repossessed assets declined a combined $895 thousand over the same period. The increase in non-accrual loans was mostly due to three commercial mortgage loans totaling $5.9 million and one $2.6 million commercial loan.
Loans past due 90 days or more and still accruing increased $6.0 million to $19.5 million, or 0.20 percent of total loans at June 30, 2009 compared to $13.5 million, or 0.14 percent at March 31, 2009. The increase was mainly due to one commercial loan and four commercial mortgage loans with a combined total of $3.6 million, as well as ten additional residential mortgage loans totaling $2.0 million. The increase in loan delinquencies reflects the difficult economic climate, however, we believe our high underwriting policies continue to mitigate much of the potential impact of the economic environment as we view our overall delinquencies as relatively small in comparison to many other financial service providers.
Troubled debt restructured loans, with modified terms and not reported as loans 90 days or more past due and still accruing or non-accrual, increased $14.1 million to $21.9 million at June 30, 2009 as compared to $7.8 million at March 31, 2009, primarily due to one aviation related commercial loan relationship.
Loans and Deposits
During the quarter, loans decreased $219.6 million to approximately $9.6 billion at June 30, 2009. The linked quarter decrease was mainly comprised of decreases in residential mortgage, automobile, commercial and construction loans of $104.4 million, $80.0 million, $49.7 million and $25.1 million, respectively, partially offset by a $52.0 million increase in commercial mortgage loans. The decline and lack of growth in the residential mortgage loan portfolio continued during the second quarter of 2009 as expected by management. The decrease was due to our sale of most refinanced loans and new loan originations in the secondary market based on the current level of interest rates and our management strategies for balance sheet and interest rate risk. Our automobile loan portfolio has declined for four consecutive quarters mainly due to low consumer demand for such products, as well as Valley's move to further strengthen its already conservative auto loan underwriting standards in light of current economic conditions. The decline in commercial loans is mainly due to a slowdown in new commercial loan activity and a slight decrease in usage of commercial lines of credit by our customers. Construction loans decreased due to normal incremental paydowns on existing loans coupled with lower new loan volume due to the slowdown in the housing market. Commercial mortgage loans continue to modestly increase quarter over quarter as we benefit from the dislocation in the credit markets for new loans with quality borrowers. We may experience further declines in automobile and residential mortgage loans during 2009 if the recession continues and we maintain our current asset/liability management strategies.
During the quarter, deposits decreased $98.1 million to approximately $9.3 billion at June 30, 2009. At June 30, 2009, time deposits decreased $512.8 million, partially offset by increases in savings, NOW, and money market deposits and non-interest bearing deposits totaling $287.3 million and $127.4 million, respectively, as compared to March 31, 2009. Time deposits declined 14.0 percent during the second quarter as management chose to be less competitive on interest rates to retain certificates of deposit due to growth in other deposits and a decline in overall loan volumes. The increases in both non-interest bearing and savings, NOW, and money market deposits were mainly due to higher customer balances which may be reflective of the surge in the U.S. household savings rate caused in part by the economic recession. We also continued to see some migration of customer repo sweep account balances (recorded as short-term borrowings) into these accounts due to lower interest rates.
Net Interest Income and Margin
Net interest income on a tax equivalent basis was $114.4 million for the second quarter of 2009, an increase of $10.5 million from the same quarter of 2008 and an increase of $3.6 million from the linked quarter ended March 31, 2009. The linked quarter increase was primarily due to lower interest expense caused by maturing high cost time deposits and short-term FHLB advances during the second quarter of 2009 and latter half of the first quarter of 2009. A four basis point increase in the yield on average loans also contributed to the increase in net interest income for the second quarter of 2009. The positive effect of these items on our net interest income was partially negated by a $244.8 million decrease in average loans during the three months ended June 30, 2009.
The net interest margin on a tax equivalent basis was 3.52 percent for the second quarter of 2009, an increase of 17 basis points from 3.35 percent for the linked quarter ended March 31, 2009 and an increase of 4 basis points as compared to the second quarter of 2008. The cost of average interest bearing liabilities declined 13 basis points from the first quarter of 2009 mainly due to a 24 basis point decrease in the cost of average time deposits caused by maturing higher cost certificates of deposit. The yield on average interest earning assets increased by 5 basis points on a linked quarter basis mainly due to a 4 basis point increase in yield on average loans as compared to the three months ended March 31, 2009.
Our cost of total deposits totaled 1.36 percent for the second quarter of 2009 compared to 1.54 percent for the three months ended March 31, 2009. The decrease of 18 basis points was due to lower interest rates on savings, NOW, and money market accounts, maturing high cost certificates of deposit and a $96.8 million increase in average non-interest bearing deposits. The cost of average short-term borrowings decreased by 118 basis points as compared to the first quarter of 2009 as higher cost short-term FHLB advances represented a smaller portion of the average balance. Valley had $200 million in short-term FHLB advances that matured between February and March of 2009 and $100 million that matured in April 2009. Short-term borrowings, primarily consisting of customer repo account balances, did not include FHLB advances at June 30, 2009.
Non-Interest Income (Loss)
Second quarter of 2009 compared with second quarter of 2008
Non-interest income for the second quarter of 2009 decreased $18.3 million to a non-interest loss of $389 thousand as compared to non-interest income of approximately $18.0 million for the quarter ended June 30, 2008 mainly due to net trading losses of $18.6 million in the second quarter of 2009. The net trading losses consisted of a $24.4 million non-cash charge on the change in the fair value of the junior subordinated debentures carried at fair value, partially offset by $4.2 million in mark to market gains on the fair value of trading securities and $1.6 million in realized gains on sales of trading securities. BOLI income decreased $1.5 million as compared to the second quarter of 2008 mainly due to the severe downturn in financial markets and its negative impact on the performance of the underlying investment securities of the BOLI asset. Net impairment losses on securities increased by $1.0 million to $2.4 million for the second quarter of 2009 compared to $1.4 million for the same period of 2008. The 2009 period included, as noted above, other-than-temporary impairment charges for estimated credit losses on four private label mortgage-backed securities and the 2008 period included total other-than-temporary impairment charges on equity securities issued by two financial institutions and one Freddie Mac perpetual preferred security. Net gains on sales of loans increased $2.0 million to $2.4 million for the quarter ended June 30, 2009 mainly due to higher sale volumes. Valley is currently selling most refinanced and new residential mortgage loan originations in the secondary market due to the level of current interest rates.
Second quarter of 2009 compared with first quarter of 2009
Non-interest income for the second quarter of 2009 decreased $31.4 million to a non-interest loss of $389 thousand as compared to non-interest income of $31.0 million for the first quarter of 2009 mainly due to a decline in net trading gains of $31.9 million. The majority of the decrease in net trading gains was caused by a $24.4 million non-cash charge on the change in the fair value of the junior subordinated debentures in the second quarter of 2009, as compared to a $13.8 million non-cash gain recognized on the change in the fair value of these debentures in the first quarter of 2009.
Non-Interest Expense
Second quarter of 2009 compared with second quarter of 2008
Non-interest expense increased approximately $14.1 million to $78.1 million for the quarter ended June 30, 2009 from $64.0 million for the quarter ended June 30, 2008 mainly due to a $10.0 million increase in the FDIC insurance assessment. The majority of the increased assessment consists of a five basis point special assessment (imposed on all insured depository institutions based on assets minus Tier 1 capital as of June 30, 2009) which totaled $6.5 million for Valley. The FDIC insurance assessment also increased due to the depletion of our prior period FDIC acquisition credit, higher normal assessment rates and our election to participate in the FDIC's Temporary Liquidity Guarantee Program. Salary and employee benefits increased a combined $2.3 million and net occupancy and equipment expense increased $1.6 million as compared to the second quarter of 2008 primarily due to Valley's acquisition of Greater Community Bancorp and its 16 full-service branches on July 1, 2008, as well as additional staffing at 5 de novo branches opened since June 30, 2008. Management maintains a strong focus on controlling operating expenses as our branch network expands through strategic growth opportunities in our primary markets.
Second quarter of 2009 compared with first quarter of 2009
Non-interest expense increased by $1.2 million, or 1.5 percent to $78.1 million for the second quarter of 2009 from $76.9 million for the linked quarter ended March 31, 2009. The FDIC's insurance assessment increased $7.1 million from the linked quarter mainly due to a special assessment totaling $6.5 million imposed during the second quarter of 2009. Salary and employee benefits decreased a combined $2.4 million mainly due to staffing efficiencies realized in the second quarter of 2009, as well as lower payroll taxes caused by maximums reached on certain annual tax limits. Amortization of other intangible assets decreased $1.8 million due to a $681 thousand net valuation allowance recovery on the fair value of previously impaired loan servicing rights during the second quarter of 2009 as compared to a $1.1 million impairment charge incurred on loan servicing rights in the first quarter of 2009. Net occupancy and equipment expense decreased $1.2 million mainly as a result of normal seasonal declines in utilities and other maintenance expenses.
Income Tax Expense
Income tax expense was $6.6 million for the second quarter of 2009, reflecting an effective tax rate of 30.4 percent, compared with $9.3 million for the second quarter of 2008, reflecting an effective tax rate of 18.3 percent. The higher effective tax rate for the second quarter of 2009 as compared to the same period of 2008 was primarily the result of lower tax advantaged income (caused by a reduction in BOLI income, and a decrease in non-taxable income and dividends from investment securities), higher state tax expense and a $6.5 million reduction in Valley's deferred tax asset valuation allowance in the second quarter of 2008.
Income tax expense was $22.8 million for the six months ended June 30, 2009, reflecting an effective tax rate of 30.3 percent, compared with $21.0 million for the six months ended June 30, 2008, reflecting an effective tax rate of 22.4 percent.
