Valley National Bancorp Reports Strong Increase In Fourth Quarter Net Income, Solid Net Interest Margin And Commercial Loan Growth

WAYNE, N.J., Jan. 25, 2017 /PRNewswire/ -- Valley National Bancorp (NYSE: VLY), the holding company for Valley National Bank, today reported net income for the fourth quarter of 2016 of $50.1 million, or $0.19 per diluted common share, as compared to the fourth quarter of 2015 earnings of $4.7 million, or $0.01 per diluted common share, and net income of $42.8 million, or $0.16 per diluted common share, for the third quarter of 2016. 

Net income for the year ended December 31, 2016 was $168.1 million, or $0.63 per diluted common share, compared to 2015 earnings of $103.0 million, or $0.42 per diluted common share. The earnings for both the fourth quarter of 2015 and the year ended December 31, 2015 included a pre-tax $51.1 million loss on the extinguishment of $845 million in high-cost debt.

Key financial highlights for the fourth quarter:

• Net Interest Income and Margin: Net interest income on a tax equivalent basis of $166.6 million for the fourth quarter of 2016 increased $10.3 million as compared to the third quarter of 2016 and increased $16.5 million as compared to the fourth quarter of 2015. Our net interest margin on a tax equivalent basis increased 13 basis points to 3.27 percent in the fourth quarter of 2016 as compared to 3.14 percent for the third quarter of 2016, and decreased 3 basis points from 3.30 percent in the fourth quarter of 2015. The increase in both net interest income and margin from the third quarter of 2016 was due, in part, to an increase in periodic loan fee income, higher interest accretion from certain purchased credit-impaired (PCI) loan pools, strong loan growth, as well as a moderate decrease in our cost of funds during the fourth quarter. Our cost of funds declined to 73 basis point for the fourth quarter of 2016 as compared to 76 basis points for the third quarter of 2016 partly due to the full-quarter benefit realized from our August 2016 modification of high-cost borrowings totaling $405 million. See the "Net Interest Income and Margin" section below for more details.
• Loan Portfolio: Loans increased $602.0 million, or 14.5 percent on an annualized basis, to approximately $17.2 billion at December 31, 2016 from September 30, 2016 largely due to increases of $427.9 million and $79.2 million in total commercial real estate loans and commercial and industrial loans, respectively. Residential mortgage loans also increased $41.8 million to $2.9 billion at December 31, 2016 from September 30, 2016 exclusive of $82.7 million of new fixed-rate mortgages originated for sale during the fourth quarter. Total new organic loan originations, excluding new lines of credit and purchased loans, totaled over $1.4 billion mostly in the commercial loan categories during the fourth quarter of 2016. See additional information under the "Loans, Deposits and Other Borrowings" section below.
• Asset Quality: Non-performing assets (including non-accrual loans) decreased by 3.1 percent to $49.4 million at December 31, 2016 as compared to $51.0 million at September 30, 2016 due to moderate declines in both non-accrual loans and other real estate owned. Total accruing past due and non-accrual loans as a percentage of our entire loan portfolio of $17.2 billion increased to 0.55 percent at December 31, 2016 from 0.47 percent at September 30, 2016 due, in part, to several matured performing commercial loans in the normal process of renewal at December 31, 2016.
• Provision for Credit Losses: During the fourth quarter of 2016, we recorded a provision for credit losses totaling $3.8 million as compared to $5.8 million for the third quarter of 2016 and $3.5 million for the fourth quarter of 2015. For the fourth quarter of 2016, we recognized net loan charge-offs of $110 thousand as compared to $3.3 million for the third quarter of 2016 and $1.8 million for the fourth quarter of 2015. See the "Credit Quality" section below for more details on our provision and allowance for credit losses.
• Non-Interest Income: Non-interest income increased $7.8 million to $32.7 million for the three months ended December 31, 2016 from $24.9 million for the third quarter of 2016 mainly due to an increase of $7.5 million in net gains on the sale of residential mortgage loans. The increase in net gains was mostly due to the completion of the sale of approximately $170 million of performing 30-year fixed rate mortgages that were transferred to loans held for sale from the loan portfolio during the third quarter of 2016.
• Non-Interest Expense: Non-interest expense increased $11.6 million to $124.8 million for the fourth quarter of 2016 from $113.3 million for the third quarter of 2016 largely due to a $6.9 million increase in the amortization of tax credit investments, a $3.3 million increase in cash incentive compensation accruals, as well as a moderate increase in repairs and maintenance expense.
• Earnings Enhancement Program: In December 2016, Valley announced a company-wide earnings enhancement initiative called LIFT. The LIFT program will seek to identify both additional operating expense reduction and revenue enhancement opportunities, which together are anticipated to contribute to sustainable improvement in our earnings for years to come. Valley has selected EHS Partners, LLC, a New York based consulting firm, to help achieve its program goals. The planning and discovery phase for LIFT has already commenced and is scheduled for completion during the first half of 2017 (with the implementation phase beginning soon thereafter).
• Income Tax Expense: Income tax expense totaled $18.3 million during the fourth quarter of 2016, representing an effective tax rate of 26.8 percent, as compared to $17.0 million for the third quarter of 2016, representing an effective tax rate of 28.5 percent. The decline in the effective tax rate from the third quarter of 2016 was primarily due to an increase in tax credits. For 2017, we anticipate that our effective tax rate will range from 27 percent to 31 percent primarily reflecting the impacts of tax-exempt income, tax-advantaged investments and general business credits, exclusive of any potential future tax reform measures or other unanticipated changes in tax laws and regulations.
• Capital Strength: Our regulatory capital ratios reflect a strong capital position at December 31, 2016. Valley's total risk-based capital, Tier 1 risk-based capital, Tier 1 leverage capital, and common equity Tier 1 capital ratios were 12.15 percent, 9.90 percent, 7.74 percent and 9.27 percent, respectively, at December 31, 2016. In December 2016, Valley issued and sold 9.24 million shares of its common stock in a registered public offering. The net proceeds totaled $106.4 million and, among other things, will be used to support continued loan growth.

Gerald H. Lipkin, Chairman and CEO commented that, "We are pleased with our earnings performance in the fourth quarter of 2016 which reflected a 17.7 percent increase in net income available to common shareholders as compared to the third quarter of 2016.  Our net income for the fourth quarter continued to benefit from the strong loan growth in 2016 and our continued efforts to reduce our overall cost of funds.  The 2016 loan growth totaled 7.4 percent despite a large number of residential mortgage loans and originations sold, in part, to manage the overall interest rate risk of our balance sheet."

Mr. Lipkin added, "The recently announced earnings enhancement program follows our success in recognizing over $19 million in operating cost savings derived from our 2015 Branch Efficiency and Cost Reduction Plans largely executed and completed in 2016. While Valley showed its ability to produce strong growth in 2016, future exceptional financial performance will require our commitment to accomplish such growth on an expense platform that is more efficient and effective, and can deliver a customer experience that is second to none.  As we look forward to 2017, we are excited about the opportunities this new endeavor and our continued growth strategies will present to Valley and its customers and shareholders."

Net Interest Income and Margin

Net interest income on a tax equivalent basis totaling $166.6 million for the fourth quarter of 2016 increased $10.3 million and $16.5 million as compared to the third quarter of 2016 and fourth quarter of 2015, respectively.  Interest income on a tax equivalent basis increased $9.9 million to $203.3 million for the fourth quarter of 2016 as compared to the third quarter of 2016 largely due to a 14 basis point increase in the yield on average loans, and increases of $209.0 million and $152.0 million in average loans and investment securities, respectively.  The increase in loan yield was supplemented by higher interest accretion on certain acquired PCI loan pools caused by improvements in their forecasted cash flows during the fourth quarter of 2016, as well as a moderate increase in market interest rates, including higher rates on our prime rate-indexed loan portfolios during mid-December. The loan yield for the fourth quarter of 2016 also included approximately $5.0 million of additional periodic fee income related to derivative interest rate swaps executed with commercial lending customers and loan prepayment penalty fees as compared to the third quarter of 2016.  Interest expense of $36.7 million for the three months ended December 31, 2016 decreased $357 thousand from the third quarter of 2016, and decreased $848 thousand as compared to the fourth quarter of 2015.  During the fourth quarter of 2016, our interest expense on long-term borrowings declined by $693 thousand largely due to the full-quarter benefit of the interest rate reduction resulting from the modification of $405 million in FHLB borrowings during August 2016, as well as the maturity of $75 million in high-cost borrowings in late July 2016. The decrease was partially offset by higher interest expense on savings, NOW and money market deposits resulting from a $524.8 million increase in average balances as compared to the third quarter of 2016.  The increase in average balances resulted from our utilization of more low-cost brokered money market deposits for liquidity and loan funding purposes, and a moderate shift from short-term borrowings that were previously used, in part, to fund the repayment of matured long-term borrowings during 2016.

The net interest margin on a tax equivalent basis was 3.27 percent for the fourth quarter of 2016, an increase of 13 basis points from 3.14 percent in the linked third quarter of 2016 and a 3 basis point decrease from 3.30 percent for the three months ended December 31, 2015.  The yield on average interest earning assets also increased by 10 basis points on a linked quarter basis.  The higher yield was mainly a result of the aforementioned increase in the yield on average loans to 4.27 percent for the fourth quarter of 2016.  This was caused, in part, by the aforementioned $5.0 million increase in periodic loan fee income as compared to the third quarter of 2016. The $5.0 million increase represented approximately 12 basis points of the 4.27 percent yield on average loans for the fourth quarter of 2016, and 10 basis points of the 13 basis point increase in our net interest margin from the third quarter of 2016. The yield on average investment securities also moderately increased during the fourth quarter of 2016.  The overall cost of average interest bearing liabilities decreased by 4 basis points from 1.02 percent in the linked third quarter of 2016.  The decrease was primarily due to a 12 basis point decrease in the cost of long-term borrowings mostly caused by the aforementioned debt modification and an increase in the portion of our funding base represented by low-cost brokered deposits, partially offset by an 11 basis point increase in the cost of short-term borrowings.  Our cost of deposits totaled 0.46 percent for the fourth quarter of 2016 as compared to 0.47 percent for the three months ended September 30, 2016. 

Loans, Deposits and Other Borrowings

Loans. Loans increased $602.0 million to approximately $17.2 billion at December 31, 2016 from September 30, 2016, net of a $85.6 million decline in the PCI loan portion of the portfolio.  During the fourth quarter of 2016, Valley also originated $82.7 million of residential mortgage loans for sale rather than investment.  Loans held for sale totaled $57.7 million and $202.4 million at December 31, 2016 and September 30, 2016, respectively.

Total commercial and industrial loans increased $79.0 million, or 12.4 percent on an annualized basis, from September 30, 2016 to approximately $2.6 billion at December 31, 2016, despite a $11.4 million decline in the PCI loan portion of the portfolio during the fourth quarter of 2016. The growth in non-PCI loans was largely due to a few large customer relationships, including a secured commercial lending arrangement with a large regional auto retailer.  In addition to the PCI loan repayments, the level of new loan volumes within this portfolio continues to be challenged by strong market competition for both new and existing commercial loan borrowers within our primary markets.

Total commercial real estate loans (excluding construction loans) increased $405.8 million from September 30, 2016 to $8.7 billion at December 31, 2016 mostly due to an increase in the non-PCI loan portfolio of $449.5 million, or 25.0 percent on an annualized basis.  The increase in non-PCI loans was mainly caused by solid organic loan volumes in New York and New Jersey, as well as approximately $153 million of participations in multi-family loans (mostly in New York City) purchased during the fourth quarter of 2016.  The purchased participation loans continue to be seasoned loans with expected shorter durations.  Each purchased participation loan was stress-tested by Valley under its normal underwriting criteria to further satisfy ourselves as to their credit quality.  These participations and the organic loan volumes  that were generated across a broad based segment of borrowers within the commercial real estate portfolio were partially offset by a $43.7 million decline in the acquired PCI loan portion of the portfolio. Construction loans increased $22.4 million, or 11.2 percent on an annualized basis, to $824.9 million at December 31, 2016 from September 30, 2016.  The quarter over quarter increase continued to be mainly due to advances on existing construction projects.

Total residential mortgage loans increased $41.8 million, or 5.9 percent on annualized basis, to approximately $2.9 billion at December 31, 2016 from September 30, 2016 mostly due to an increase in total loans originations, as well as a larger percentage of such loans originated for investment rather than sale as compared to the third quarter of 2016.  As a result, Valley's loans originated for sale declined to $82.7 million for the fourth quarter of 2016 from $171.9 million for the third quarter of 2016.  Total new and refinanced residential mortgage loan originations were approximately $371.3 million for the fourth quarter of 2016 as compared to $258.3 million and $72.4 million for the third quarter of 2016 and fourth quarter of 2015, respectively.  Of the $371.3 million in total originations, $18.8 million, or 5.1 percent, represented new residential mortgage loans originated in Florida.

Home equity loans decreased by $7.8 million to $469.0 million at December 31, 2016 as compared to September 30, 2016 mostly due to normal repayment activity largely within the PCI loan portion of the portfolio.  New home equity loan volumes and customer usage of existing home equity lines of credit continue to be weak, despite the relatively favorable low interest rate environment.

Automobile loans increased by $17.9 million, or 6.4 percent on an annualized basis, to $1.1 billion at December 31, 2016 as compared to September 30, 2016.  The fourth quarter increase in auto loans reversed a negative trend in the level of our new indirect auto loan volumes experienced during the first nine months of 2016 which was caused, in part, by new regulatory constraints on market pricing and fees. During the third quarter of 2016, management implemented various strategies to enhance new auto volumes, including new technology to improve the decision-making process for our auto dealer network.  These enhancements and continued growth in our relatively new Florida markets led to higher new loan volumes during the fourth quarter of 2016.  While we are optimistic that this positive trend in new loan production will continue into the first quarter of 2017, we can provide no assurance that our auto loans will not decline in future periods.

Other consumer loans increased $43.0 million, or 32.2 percent on an annualized basis, to $577.1 million at December 31, 2016 as compared to September 30, 2016 mainly due to continued growth and customer usage of collateralized personal lines of credit.

Deposits. Total deposits increased $758.5 million, or 4.5 percent, to approximately $17.7 billion at December 31, 2016 from September 30, 2016 mostly due to an increased use of low-cost brokered money market deposits as part of our current funding strategy, as well as normal fluctuations in our non-interest bearing deposit accounts. Non-interest bearing deposits; savings, NOW and money market deposits; and time deposits represented approximately 29 percent, 53 percent and 18 percent of total deposits, respectively, as of December 31, 2016. The composition of deposits based upon the period end balances remained relatively unchanged at December 31, 2016 as compared to September 30, 2016.

Other Borrowings. Short-term borrowings decreased $352.4 million, or 24.6 percent, to approximately $1.1 billion at December 31, 2016 from September 30, 2016 mostly due to the maturity of $326 million of FHLB borrowings and a shift to additional lower cost brokered deposits from these matured instruments during the fourth quarter of 2016.  Long-term borrowing totaled $1.4 billion at December 31, 2016 and remained relatively unchanged from September 30, 2016.

Credit Quality

Non-Performing Assets. Our past due loans and non-accrual loans discussed further below exclude PCI loans. Under U.S. GAAP, the PCI loans (acquired at a discount that is due, in part, to credit quality) are accounted for on a pool basis and are not subject to delinquency classification in the same manner as loans originated by Valley.  At December 31, 2016, our PCI loan portfolio totaled $1.8 billion, or 10.3 percent of our total loan portfolio.

Total non-performing assets (NPAs), consisting of non-accrual loans, other real estate owned (OREO), other repossessed assets and non-accrual debt securities totaled $49.4 million at December 31, 2016 compared to $51.0 million at September 30, 2016. The $1.6 million decrease in NPAs from September 30, 2016 was mostly due to decreases of $933 thousand and $645 thousand in non-accrual loans and OREO at December 31, 2016, respectively.  Non-accrual loans represented only 0.22 percent and 0.23 percent of total loans at December 31, 2016 and September 30, 2016, respectively.

Total accruing past due loans (i.e., loans past due 30 days or more and still accruing interest) increased $17.5 million to $56.7 million, or 0.33 percent of total loans, at December 31, 2016 as compared to $39.2 million, or 0.24 percent of total loans, at September 30, 2016.  The increase was due, in part, to a $6.1  million increase in construction loans 30 to 59 days past due primarily caused by the late receipt of payment from a $4.2 million relationship now current to all contractual payments, as well as a $1.5 million matured performing loan in the normal process of renewal at December 31, 2016. Within the loans 60 to 89 days past due category, commercial real estate loans and commercial and industrial loans also increased $4.4 million and $4.2 million at December 31, 2016, respectively, from September 30, 2016.  The increase in commercial real estate loans was caused by two matured performing loans with a combined total of $4.5 million at December 31, 2016. The $4.2 million increase in commercial and industrial loans 60 to 89 days past due was also due to matured performing loans with an aggregate total of $4.5 million at December 31, 2016.  The $4.5 million in matured loans represent one loan relationship collateralized by New York City (NYC) taxi cab medallions.  Valley believes this relationship is well-secured and in the normal process of collection.  

At December 31, 2016, our entire taxi medallion loan portfolio totaled $151.2 million, consisting of $140.2 million and $11.0 million of NYC and Chicago taxi medallion loans, respectively.  During the fourth quarter of 2016, $4.9 million of performing Chicago taxi medallion loans were restructured into amortizing loans and had related reserves within the allowance of loan losses totaling $2.7 million at December 31, 2016.  At December 31, 2016, the Chicago medallion portfolio included one other impaired non-accrual loan relationship totaling $1.5 million, after a $3.7 million charge-off recognized in the third quarter of 2016.  With the exception of the aforementioned performing $4.5 million NYC medallion relationship that matured during the fourth quarter of 2016 (and is in the process of renewal), there were no past due or non-accruing loans within the NYC medallion portfolio at December 31, 2016.  Valley's historical taxi medallion lending criteria has been conservative in regards to capping the loan amounts in relation to market valuations, as well as obtaining personal guarantees and other collateral whenever possible.  We will continue to closely monitor this portfolio's performance and the potential impact of the changes in market valuation for taxi medallions due to competing car service providers and other factors. Overall, we believe our credit quality metrics continue to reflect our solid underwriting standards at December 31, 2016. However, we can provide no assurances as to the future level of our loan delinquencies.

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 (including PCI loans) at December 31, 2016, September 30, 2016, and December 31, 2015:

Our loan portfolio, totaling $17.2 billion at December 31, 2016, had net loan charge-offs of $110 thousand for the fourth quarter of 2016 as compared to $3.3 million and $1.8 million for the third quarter of 2016 and fourth quarter of 2015, respectively.  The quarter over quarter decrease in net loan charge-offs was largely due to a decline in commercial and industrial loan gross charge-offs, as a Chicago tax medallion relationship was partially charged off by $3.7 million in the linked third quarter of 2016. Overall, net loan charge-offs decreased to $3.6 million for the year ended December 31, 2016 from $4.0 million for the year ended December 31, 2015.  During the fourth quarter of 2016, we recorded a provision for credit losses totaling $3.8 million as compared to $5.8 million for the third quarter of 2016 and $3.5 million for the fourth quarter of 2015.  Overall, our provision for credit losses was $11.9 million for the year ended December 31, 2016 as compared to $8.1 million for the year ended December 31, 2015. 

The allowance for credit losses, comprised of our allowance for loan losses and reserve for unfunded letters of credit, as a percentage of total loans was 0.68 percent at December 31, 2016 and remained unchanged from both September 30, 2016 and December 31, 2015.  At December 31, 2016, our allowance allocations for losses as a percentage of total loans remained relatively stable in most loan categories as compared to September 30, 2016, but increased 0.25 percent for construction loans primarily due to changes in our qualitative loss factor estimate related to the volume of loans serviced by third parties in this portfolio. In addition to this factor, significant loan growth within several loan categories, the level of net charge-offs and internally classified loans, assumptions based on the current economic environment, as well as other qualitative factors, impacted our estimate of the allowance for credit losses at December 31, 2016.

Our allowance for credit losses as a percentage of total non-PCI loans (excluding PCI loans with carrying values totaling approximately $1.8 billion) was 0.75 percent at December 31, 2016 as compared to 0.76 percent and 0.79 percent at September 30, 2016 and December 31, 2015, respectively. PCI loans, largely acquired through prior bank acquisitions, are accounted for on a pool basis and initially recorded net of fair valuation discounts related to credit which may be used to absorb future losses on such loans before any allowance for loan losses is recognized subsequent to acquisition.  Due to the adequacy of such discounts, there were no allowance reserves related to PCI loans at December 31, 2016. 

About Valley

Valley National Bancorp is a regional bank holding company headquartered in Wayne, New Jersey with approximately $22.9 billion in assets. Its principal subsidiary, Valley National Bank, currently operates 209 branch locations serving northern and central New Jersey, the New York City boroughs of Manhattan, Brooklyn, Queens and Long Island, and Florida. Valley National Bank is one of the largest commercial banks 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. For more information about Valley National Bank and its products and services, please visit www.valleynationalbank.com or call Customer Service, 24/7 at 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:

• weakness or a decline in the U.S. economy, in particular in New Jersey, New York Metropolitan area (including Long Island) and Florida as well as an unexpected decline in commercial real estate values within our market areas;
• less than expected cost savings and revenue enhancement from Valley's cost reduction plans including its earnings enhancement program called "LIFT";
• damage verdicts or settlements or restrictions related to existing or potential litigations arising from claims of breach of fiduciary responsibility, negligence, fraud, contractual claims, environmental laws, patent or trade mark infringement, and other matters;
• cyber attacks, computer viruses or other malware that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems;
• results of examinations by the OCC, the FRB, the CFPB and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for credit losses, write-down assets, require us to reimburse customers, change the way we do business, or limit or eliminate certain other banking activities;
• changes in accounting policies or accounting standards, including the new authoritative accounting guidance (known as the current expected credit loss (CECL) model) which may increase the required level of our allowance for credit losses after adoption on January 1, 2020;
• higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from changes in tax laws, regulations and case law;
• government intervention in the U.S. financial system and the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve;
• unexpected changes in market interest rates for interest earning assets and/or interest bearing liabilities;
• changes in investor sentiment or consumer spending savings behavior;
• our inability to pay dividends at current levels, or at all, because of inadequate future earnings, regulatory restrictions or limitations, and changes in the composition of qualifying regulatory capital and minimum capital requirements (including those resulting from the U.S. implementation of Basel III requirements);
• less than expected cost savings from the maturity, modification or prepayment of long-term borrowings that mature through 2022;
• further prepayment penalties related to the early extinguishment of high cost borrowings;
• higher than expected loan losses within one or more segments of our loan portfolio;
• lower than expected cash flows from purchased credit-impaired loans;
• unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather or other external events;
• unexpected significant declines in the loan portfolio due to the lack of economic expansion, increased competition, large prepayments, changes in regulatory lending guidance or other factors;
• the failure of other financial institutions with whom we have trading, clearing, counterparty and other financial relationships; and
• inability to retain and attract customers and qualified employees.

A detailed discussion of factors that could affect our results is included in our SEC filings, including the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2015. 

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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SOURCE Valley National Bancorp