Oct. 22, 2009 (PR Newswire) -- WAYNE, N.J., Oct. 22 /PRNewswire-FirstCall/ -- Valley National Bancorp (NYSE: VLY), the holding company for Valley National Bank, today reported net income for the third quarter of 2009 of $31.6 million, $0.18 per diluted common share, compared to third quarter of 2008 earnings of $3.6 million, or $0.03 per diluted common share. Diluted earnings per common share were negatively impacted by accrued preferred stock dividends and accretion totaling $6.0 million ($0.04 per common share) and a $2.8 million ($0.01 per common share) non-cash charge due to the change in the fair value of junior subordinated debentures carried at fair value for the third quarter of 2009. For the third quarter of 2008, diluted earnings per common share were reduced by other-than-temporary impairment and realized losses totaling $70.9 million ($0.31 per common share) on Fannie and Freddie Mac perpetual preferred stock, partially offset by a $20.9 million ($0.10 per common share) non-cash gain due to the change in the fair value of junior subordinated debentures.
Performance Highlights
-- Net Interest Margin: Net interest margin on a tax equivalent basis was
3.61 percent in the third quarter of 2009 versus 3.52 percent in the
second quarter of 2009 and 3.64 percent in the third quarter of 2008.
The linked quarter increase in net interest margin resulted mainly from
lower interest rates on time deposits, maturing high cost time deposits,
and a slightly higher yield on the loan portfolio. Net interest income
on a fully tax equivalent basis increased by $2.0 million as compared to
the second quarter of 2009. See "Net Interest Income and Margin"
section below for more details.
-- Asset Quality: Total loans past due 30 days or more on our entire loan
portfolio of $9.5 billion were 1.60 percent at September 30, 2009
compared to 1.49 percent at June 30, 2009. Our commercial real estate
loan portfolio had loans past due 30 days or more totaling 1.05 percent
at September 30, 2009. The residential mortgage and home equity loan
portfolios totaling approximately 23,000 individual loans had only 211
loans past due 30 days or more at September 30, 2009. The residential
mortgage and home equity loan delinquencies totaled $40.5 million, or
1.57 percent of $2.6 billion in total loans within these categories at
September 30, 2009. See "Credit Quality" section below for more details.
-- Provision for credit losses: The provision for credit losses totaled
$12.7 million for the third quarter of 2009 as compared to $13.1 million
for the second quarter of 2009 and $6.9 million for the third quarter of
2008. The provision for credit losses was $2.7 million higher than net
charge-offs totaling $10.0 million for the third quarter of 2009 due to,
among other factors, an increase in the valuation allowance for impaired
loans (mainly consisting of non-accrual commercial and industrial loans
and commercial real estate loans) and the potential impact of a
prolonged economic recovery on our asset quality.
-- Capital Strength: 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 12.66 percent, 10.77
percent, and 8.46 percent, respectively at September 30, 2009. During
the third quarter of 2009, we completed our previously announced
"at-the-market" common equity offering, consisting of the sale of 5.67
million shares of newly issued common stock for net proceeds totaling
$71.6 million. All share transactions under the program occurred during
the third quarter of 2009, except for 43 thousand shares totaling $401
thousand in net proceeds during the second quarter of 2009.
In September 2009, we repurchased 125,000 of our Series A Fixed Rate Cumulative Perpetual Preferred Stock from the U.S. Department of the Treasury for an aggregate purchase price of $125.7 million (including accrued and unpaid dividends). Including our repurchase of 75,000 shares in June 2009, we have repurchased $200 million of $300 million in senior preferred shares issued to the Treasury under the Capital Purchase Program during November 2008.
-- Loans: Commercial real estate loans grew by $74.1 million, or 8.7
percent on an annualized basis as we continue to find quality lending
opportunities made available by the tight credit markets. However, the
overall loan portfolio declined 4.5 percent on an annualized basis to
$9.5 billion at September 30, 2009 as all other loan categories
experienced declines during the quarter. The declines were due to
several factors, including our high credit standards, current economic
conditions, and our decision to sell or hold for sale approximately $93
million in residential mortgage loan originations during the third
quarter of 2009. See "Loans and Deposits" section below for more
details.
-- Trading: The Company did not engage in trading activity during the third
quarter of 2009. Net income included net trading losses totaling $3.5
million for the third quarter of 2009 which consist of non-cash mark to
market losses on our junior subordinated debentures carried at fair
value and the fair value of our trading securities portfolio.
-- Operating Efficiency: Total operating expenses for the third quarter of
2009 decreased by 5.4 percent to $73.9 million from $78.1 million in the
second quarter of 2009 mainly due to a $6.5 million FDIC special
assessment recorded as of June 30, 2009. Our operating efficiency ratio
was 55.9 percent for the third quarter of 2009.
On September 29, 2009, the FDIC proposed a rule that would require insured institutions to prepay their estimated quarterly assessments through December 31, 2012 to strengthen the cash position of the Deposit Insurance Fund. Once final, the rule would require the cash prepayment on December 30, 2009. Management believes the prepayment (estimated to be approximately $48.5 million) will not have a significant impact on our future cash position or operations.
Chairman's Comments
Gerald H. Lipkin, Chairman, President and CEO commented that, "The third quarter 2009 results produced no real surprises as Valley continues to perform well in the face of one of the worst economic recessions in recent history. The economy's slow recovery from the recession continues to impact us as well as all financial institutions. However, our net interest margin, the main driver of our business, has shown continued strength and improved by 9 basis points from the second quarter of 2009 to 3.61 percent on a tax equivalent basis for the third quarter of 2009. The net interest margin results, including the increase in net interest income as compared to the second quarter of 2009, is a clear reflection of our disciplined management of lending and our marginal cost of funds.
We are pleased with the level of loan delinquencies when compared to the most recent results reported by our peers. Our total delinquencies 30 days or more past due for the entire loan portfolio were 1.60 percent, of which only 1.02 percent are greater than 90 days past due or non-accrual loans. Additionally, we believe our commercial real estate loan delinquencies totaling 1.05 percent at September 30, 2009 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, we recorded a provision for credit losses that was $2.7 million greater than net charge-offs during the third quarter of 2009. The addition to our reserves was, among other factors, to provide for potential loan deterioration that may result from a prolonged U.S. economic recession. The allowance for credit losses as a percentage of total loans increased 4 basis points to 1.10 percent at September 30, 2009 as compared to June 30, 2009 and increased 21 basis points compared to September 30, 2008.
Our capital levels remained strong, and as a result we were able to repurchase $125 million of our senior preferred shares from the Treasury after careful consideration of our balance sheet's credit risk and economic conditions. This repurchase will reduce future preferred dividends and should have a positive impact on net income available to our common stockholders. We may request future redemptions of part or all of our remaining $100 million in senior preferred shares depending on the path of the economy, our future performance and capital needs."
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 $9.5 billion, net loan charge-offs for the third quarter of 2009 were $10.0 million compared to $8.2 million for the second quarter of 2009, and $4.4 million for the third quarter of 2008.
Valley's allocated reserves for the commercial and industrial loan portfolio increased $3.0 million or 22 basis points as a percentage of the commercial loan portfolio during the period mainly due to specific reserves for one new impaired loan relationship. 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:
September 30, 2009 June 30, 2009
------------------ -------------
Allocation Allocation
as a % of as a % of
Allowance loan Allowance loan
Allocation category Allocation category
---------- -------- ---------- --------
Loan category:
Commercial and
Industrial loans* $56,682 3.14% $53,721 2.92%
Mortgage:
Construction 13,828 3.10% 14,856 3.10%
Residential
mortgage 5,538 0.28% 4,911 0.24%
Commercial real
estate 10,539 0.30% 10,398 0.31%
------ ------
Total mortgage loans 29,905 0.50% 30,165 0.51%
Consumer:
Home equity 1,708 0.30% 1,686 0.29%
Other consumer 10,683 0.89% 10,721 0.86%
------ ------
Total consumer loans 12,391 0.70% 12,407 0.67%
Unallocated 6,076 NA 6,024 NA
----- -----
$105,054 1.10% $102,317 1.06%
======== ========
September 30, 2008
------------------
Allocation
as a % of
Allowance loan
Allocation category
---------- --------
Loan category:
Commercial and
Industrial loans* $40,546 2.13%
Mortgage:
Construction 14,397 3.06%
Residential
mortgage 3,771 0.16%
Commercial real
estate 12,520 0.39%
------
Total mortgage loans 30,688 0.51%
Consumer:
Home equity 1,627 0.27%
Other consumer 11,428 0.72%
------
Total consumer loans 13,055 0.60%
Unallocated 5,472 NA
-----
$89,761 0.89%
=======
* 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 $82.8 million, or 0.87 percent of loans at September 30, 2009 compared to $66.4 million, or 0.69 percent of loans at June 30, 2009. Non-accrual loans increased $16.3 million to $74.0 million at September 30, 2009 as compared to $57.7 million at June 30, 2009. The increase in non-accrual loans was mostly due to three construction loans and two commercial real estate loans totaling $14.4 million and an increase in non-performing residential mortgage loans. Management believes most of the total non-accrual loans are well secured and, ultimately, collectible based on, in part, our quarterly valuation of impaired loans. OREO and other repossessed assets totaled a combined $8.7 million at September 30, 2009, unchanged from June 30, 2009.
Loans past due 90 days or more and still accruing increased $3.6 million to $23.1 million, or 0.24 percent of total loans at September 30, 2009 compared to $19.5 million, or 0.20 percent at June 30, 2009 primarily due to a $2.6 million increase in residential mortgage loans. 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, decreased $2.6 million to $19.4 million at September 30, 2009 as compared to $22.0 million at June 30, 2009, primarily due to one commercial loan no longer classified as a troubled debt restructured loan (due to its performance to contractual terms over a period greater than 12 months).
Loans and Deposits
During the quarter, loans decreased $107.0 million to approximately $9.5 billion at September 30, 2009. The linked quarter decrease was mainly comprised of decreases in automobile, residential mortgage, commercial and industrial, and construction loans of $51.1 million, $49.7 million, $34.1 million and $32.6 million, respectively, partially offset by a $74.1 million increase in commercial real estate loans. Our automobile loan portfolio has declined for five consecutive quarters mainly due to low consumer demand for new and used vehicles, as well as Valley's move to further strengthen its auto loan underwriting standards in light of the weakened economy. The decline in the residential mortgage loan portfolio continued during the third quarter of 2009 as expected by management based on our secondary market sales of most refinanced loans and new loan originations. The decline in commercial and industrial loans is mainly due to a slowdown in new commercial loan activity and a decrease in line of credit usage by customers caused by the economy. 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 real estate loans continued to modestly increase quarter over quarter as we benefited from the dislocation in the credit markets for new loans with quality borrowers meeting our credit standards. We may experience further declines in the loan portfolio during the remainder of 2009 and 2010 due to a slow economic recovery cycle or as a result of our asset/liability management strategies, including the sale of residential mortgage loan originations with low fixed interest rates.
During the quarter, total deposits increased $122.0 million to approximately $9.4 billion at September 30, 2009. At September 30, 2009, savings, NOW, and money market deposits increased $181.5 million and time deposits increased $48.1 million, partially offset by a $107.6 million decline in non-interest bearing deposits as compared to June 30, 2009. The increases in savings, NOW, and money market deposits and time deposits were due, in part, to additional deposits generated from de novo branch locations put in-service over the last twelve months. Non-interest bearing deposits decreased 4.6 percent during the third quarter of 2009 primarily due to normal fluctuations in both commercial and retail customer account balances.
Net Interest Income and Margin
Net interest income on a tax equivalent basis was $116.4 million for the third quarter of 2009, relatively unchanged from the same quarter of 2008 and an increase of $2.0 million from the linked quarter ended June 30, 2009. The linked quarter increase was primarily due to lower interest expense caused by maturing high cost time deposits during the third quarter of 2009. A three basis point increase in the yield on average loans also contributed to the increase in net interest income for the third quarter of 2009. The positive effect of these items on our net interest income was partially negated by a $188.9 million decrease in average loans during the three months ended September 30, 2009.
The net interest margin on a tax equivalent basis was 3.61 percent for the third quarter of 2009, an increase of 9 basis points from 3.52 percent for the linked quarter ended June 30, 2009 and a decrease of 3 basis points as compared to the third quarter of 2008. The cost of average interest bearing liabilities declined 19 basis points from the second quarter of 2009 mainly due to a 51 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 decreased by 6 basis points on a linked quarter basis mainly due to a 41 basis point decrease in yield on average taxable investments as compared to the three months ended June 30, 2009.
Our cost of total deposits totaled 1.13 percent for the third quarter of 2009 compared to 1.36 percent for the three months ended June 30, 2009. The decrease of 23 basis points was due to maturing high cost certificates of deposit and a $12.3 million increase in average non-interest bearing deposits.
Non-Interest Income (Loss)
Third quarter of 2009 compared with third quarter of 2008
Non-interest income for the third quarter of 2009 increased $49.2 million to $17.1 million as compared to a non-interest loss of approximately $32.1 million for the quarter ended September 30, 2008. Net impairment losses on securities decreased by $64.8 million to $743 thousand in impairment related to additional estimated credit losses on certain private label mortgage-backed securities (that were originally deemed other-than-temporarily impaired in the first quarter of 2009) for the third quarter of 2009 compared to $65.5 million loss for the same period of 2008. The other-than-temporary impairment charges incurred during the third quarter of 2008 were due to substantial declines in value of Fannie Mae and Freddie Mac perpetual preferred securities resulting from the government's decision to place these companies into conservatorship. Net trading losses increased $18.2 million to $3.5 million for the third quarter of 2009 compared to a net trading gain of $14.7 million in the same period of 2008 primarily due to the change in the fair value of our junior subordinated debentures carried at fair value. Net gains on sales of loans increased $2.4 million to $2.7 million for the quarter ended September 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. Net losses on securities transactions decreased $1.9 million due to realized losses on the sale of certain Fannie Mae and Freddie Mac preferred securities during the third quarter of 2008. Bank owned life insurance ("BOLI") income decreased $1.2 million as compared to the third 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.
Third quarter of 2009 compared with second quarter of 2009
Non-interest income for the third quarter of 2009 increased $17.5 million to $17.1 million as compared to a non-interest loss of $389 thousand for the second quarter of 2009 mainly due to a decline in net trading losses of $15.2 million in the third quarter of 2009. The majority of the decrease in net trading losses 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 $2.8 million non-cash charge recognized on the change in the fair value of these debentures in the third quarter of 2009. The losses for the second quarter of 2009 were partially offset by mark to market and realized gains on the trading securities portfolio. Net impairment losses on securities decreased $1.7 million during the third quarter of 2009 as compared to the linked second quarter of 2009. The third quarter of 2009 included $743 thousand in additional estimated credit losses on certain private label mortgage-backed securities as compared to $2.4 million in estimated credit losses recognized on the same securities during the second quarter of 2009.
Non-Interest Expense
Third quarter of 2009 compared with third quarter of 2008
Non-interest expense totaling $73.9 million for the three months ended September 30, 2009 remained relatively unchanged from the same period one year ago. However, the FDIC insurance assessment increased $2.9 million to $3.3 million for the third quarter of 2009 as compared to $412 thousand for the third quarter of 2008 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 since the prior year period. Other non-interest expense decreased $2.0 million to $11.1 million for the three months ended September 30, 2009 as compared to the same period of 2008 due to a $1.2 million prepayment penalty on $25.0 million in Federal Home Loan Bank advances during the third quarter of 2008 and lower other real estate owned expense during the 2009 period. Salary and employee benefits also decreased a combined $1.0 million as compared to the third quarter of 2008 primarily due to staffing efficiencies fully realized during 2009 relating to staff acquired in the acquisition of Greater Community Bancorp on July 1, 2008.
Third quarter of 2009 compared with second quarter of 2009
Non-interest expense decreased by $4.2 million, or 5.4 percent to $73.9 million for the third quarter of 2009 from $78.1 million for the linked quarter ended June 30, 2009. The FDIC's insurance assessment decreased $6.9 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 increased a combined $1.2 million mainly due to additional staffing caused, in part, by five de novo branches opened since the middle of the second quarter of 2009. Amortization of other intangible assets increased $699 thousand mainly 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.
Income Tax Expense
Income tax expense was $14.0 million for the third quarter of 2009, reflecting an effective tax rate of 30.6 percent, compared with an income tax benefit of $1.2 million for the third quarter of 2008, reflecting an effective tax benefit rate of 47.6 percent. The increase in income tax expense from the 2008 period reflects the lower level of pre-tax income during the third quarter of 2008 caused by other-than-temporary impairment and realized losses on Fannie Mae and Freddie Mac perpetual preferred securities. Additionally, the effective tax rate for the third quarter of 2009 was adversely impacted by lower tax advantaged income (caused by a reduction in BOLI income, and a decrease in non-taxable income and dividends from investment securities) and higher state and local tax expense.
Income tax expense was $36.7 million for the nine months ended September 30, 2009, reflecting an effective tax rate of 30.4 percent, compared with $19.9 million for the same period of 2008, reflecting an effective tax rate of 20.6 percent. The increase was due to several factors, including the lower level of 2008 pre-tax income and a $6.5 million reduction in Valley's deferred tax asset valuation allowance in 2008. Additionally, the effective tax rate in 2009 was negatively impacted by lower tax advantaged income and higher state and local tax expense.
Management expects that our adherence to FIN 48 will continue to result in increased volatility in our future quarterly and annual effective income tax rates because FIN 48 requires that any change in judgment or change in measurement of a tax position taken in a prior annual period be recognized as a discrete event in the period in which it occurs. Factors that could impact management's judgment include changes in income tax laws and regulations, and tax planning strategies.
