Valley National Bancorp (NASDAQ:VLYPP): Navigating the Evolving Banking Landscape with Prudent Balance Sheet Management

Published on September 24, 2024 | Ticker: VLYPP

Valley National Bancorp (NASDAQ:VLYPP) has demonstrated its ability to adapt and thrive in the dynamic banking environment, delivering solid financial performance while proactively managing its balance sheet. With a focus on strategic initiatives aimed at normalizing key metrics, the company has positioned itself for continued growth and stability.

For the fiscal year ended December 31, 2023, Valley National Bancorp reported annual net income of $498.5 million, annual revenue of $3.36 billion, annual operating cash flow of $367.8 million, and annual free cash flow of $291.8 million. These robust financial results underscore the company's ability to navigate the challenges faced by the banking industry.

In the latest quarter, Valley National Bancorp reported net income of $70 million and diluted earnings per share of $0.13. The sequential reduction in net income was primarily driven by stable pre-tax pre-provision net revenue, supported by positive momentum in net interest income, and an elevated loan loss provision. Management believes this quarter's elevated provision represents the relative peak in the company's provisioning.

Business Overview

Valley National Bancorp is a diversified financial services company with a strong presence in the northeastern United States and a growing footprint in the Southeast. The company operates through two primary business segments: Consumer Banking and Commercial Banking.

The Consumer Banking segment focuses on residential mortgages, automobile loans, home equity loans, and other consumer lending products. This segment also includes the company's Wealth Management and Insurance Services Division, which provides trust, asset management, brokerage, and insurance services.

The Commercial Banking segment encompasses the company's commercial and industrial (C&I) loans, commercial real estate (CRE) loans, and construction loans. This segment caters to a diverse range of commercial customers, including small and medium-sized businesses, as well as larger corporate entities.

Geographic Diversification

Over the past several years, Valley National Bancorp has strategically expanded its geographic footprint, reducing its concentration in the New York and New Jersey markets. At the end of 2017, nearly 80% of the company's commercial loans were concentrated in these two states. As of the end of the second quarter of 2024, this figure has declined to just 50%, reflecting the company's focus on diversifying its asset base.

Similarly, the company has also diversified its deposit base, with the proportion of deposits from the Northeast declining from 78% at the end of 2017 to 43% as of the second quarter of 2024. This geographic diversification has helped to insulate Valley National Bancorp's funding sources and reduce its reliance on wholesale funding.

Balance Sheet Optimization

During the second quarter of 2024, Valley National Bancorp made significant progress in executing its strategic initiatives aimed at normalizing key balance sheet metrics. The company was able to reduce its commercial real estate (CRE) concentration ratio to its full-year 2024 target of around 440% by the end of the quarter, primarily through the reclassification of approximately $1 billion in healthcare loans to the owner-occupied CRE category and by limiting new investor CRE and multi-family originations.

Additionally, the company's allowance coverage ratio expanded to its near-term targeted level of above 1% during the quarter. Management expects to reach its intermediate-term expectation of around 1.10% by the end of 2024, which they believe is appropriate for the company's risk profile given the current market environment.

These balance sheet optimization efforts were achieved without compromising the company's future earnings capacity. In fact, management believes that the further strengthening of the balance sheet will drive stability in Valley National Bancorp's performance and enhance its relative value in the market.

Capital Strength and Liquidity

Valley National Bancorp maintains a strong capital position, with risk-based capital ratios that have improved meaningfully during the second quarter. This was primarily driven by a synthetic risk transfer transaction executed during the quarter, which reduced the risk-weighted assets associated with the company's indirect auto loan business by approximately $1 billion.

The company's liquidity position remains robust, with total liquid assets, including cash, interest-bearing deposits, and investment securities, representing 4.8% of interest-earning assets as of March 31, 2024. Valley National Bancorp has significant access to readily available, diverse funding sources, including non-deposit borrowings, to fulfill both short-term and long-term funding needs.

Loan Portfolio and Asset Quality

Valley National Bancorp's loan portfolio is well-diversified, with a balanced mix of commercial and consumer loans. As of the second quarter of 2024, the company's loan portfolio consisted of 18.2% commercial and industrial loans, 63.5% commercial real estate loans (including construction), 11.3% residential mortgages, and 7.0% consumer loans.

The company's asset quality metrics have remained relatively stable, with non-performing assets (NPAs) as a percentage of total loans and NPAs at 0.58% as of March 31, 2024, unchanged from December 31, 2023. The allowance for credit losses as a percentage of total loans stood at 0.98% at the end of the second quarter, up from 0.93% at the end of 2023.

Management has taken a conservative approach to its loan loss provisioning, with the belief that the second quarter's elevated provision represents the peak. Going forward, the company expects the provision for credit losses to trend lower over the next few quarters, with net charge-offs remaining close to current levels for the remainder of 2024.

Deposit and Funding Dynamics

Valley National Bancorp has maintained a stable deposit base, with total deposits of $49.1 billion as of March 31, 2024, down slightly from $49.2 billion at the end of 2023. The company has been successful in growing its specialty commercial deposit verticals and private banking business, which have partially offset a late-quarter dip in branch deposits.

The company's cost of total deposits increased by only 2 basis points during the second quarter, reflecting its proactive management of deposit pricing. Average non-interest-bearing deposits represented 23% of total deposits at the end of the second quarter, unchanged from the prior quarter.

Looking ahead, Valley National Bancorp expects continued momentum in its deposit growth, with average deposit balances in July already running higher than the second quarter levels as customer activity has rebounded from a brief quarter-end dip.

Net Interest Income and Margin

Valley National Bancorp reported strong performance in net interest income and net interest margin during the second quarter. Net interest income on a tax-equivalent basis totaled $394.8 million, a decrease of $3.7 million compared to the first quarter of 2024 but an increase of $42.6 million compared to the same period in 2023.

The company's net interest margin on a tax-equivalent basis was 2.79% for the second quarter, down 3 basis points from the first quarter but up 37 basis points from the same period a year ago. This performance was driven by both interest income growth and interest expense reductions relative to the first quarter.

Management forecasts continued net interest income growth, with the potential for up to 3% quarterly growth for the remainder of 2024, supported by modest balance sheet growth and the ongoing tailwind associated with asset yield expansion.

Non-Interest Income and Expense

Valley National Bancorp's non-interest income, on an adjusted basis, declined in the second quarter compared to the first quarter of 2024. This was primarily due to the normalization of tax credit advisory revenues, which had been elevated in the first quarter, as well as a negative valuation adjustment on certain fintech investments.

The company continues to focus on driving growth in its capital markets, wealth management, and treasury services channels, which are expected to contribute to the anticipated recovery in fee income for the rest of the year.

On the expense side, Valley National Bancorp's non-interest expenses were approximately $278 million for the second quarter. Adjusting for a $1.4 million FDIC special assessment and other non-core charges, non-interest expenses were approximately $270 million, representing a modest increase from both the first quarter of 2024 and the second quarter of 2023. This was primarily due to costs related to the company's credit risk transfer transaction and higher FDIC assessment expenses.

Management remains focused on headcount optimization and technology efficiencies to combat revenue pressure, and they expect non-interest expenses for the rest of the year to include approximately $6 million in premium costs related to the risk transfer transaction.

Outlook

For the remainder of 2024, Valley National Bancorp expects low single-digit annualized loan growth, driven primarily by commercial and industrial loans and owner-occupied commercial real estate. The company anticipates net interest income growth of up to 3% on a quarterly basis, supported by the continued repricing of existing assets and modest balance sheet growth.

Non-interest income is expected to recover from current levels as capital markets activity picks up and the company continues to expand its treasury management capabilities. Non-interest expenses are expected to remain well-controlled, though the full-quarter impact of the premium expense associated with the risk transfer transaction will be reflected in the third and fourth quarters.

The company's effective tax rate is likely to be in the range of 25% to 26% for the rest of 2024. From a credit perspective, management expects net charge-offs to remain around current levels for the remainder of the year, with the provision for credit losses trending lower over the next few quarters.

Conclusion

Valley National Bancorp has demonstrated its ability to navigate the evolving banking landscape through prudent balance sheet management and strategic initiatives. The company's focus on diversifying its geographic footprint, optimizing its balance sheet, and maintaining a strong capital and liquidity position has positioned it for continued growth and stability.

As the company executes on its strategic priorities, investors can expect to see further improvements in Valley National Bancorp's financial performance and risk profile, solidifying its position as a well-managed regional banking institution.

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