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VLY > SEC Filings for VLY > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for VALLEY NATIONAL BANCORP



Quarterly Report

Item 2. Management's Discussion and Analysis ("MD&A") of Financial Condition and Results of Operations

The following MD&A should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. The words "Valley," "the Company," "we," "our" and "us" refer to Valley National Bancorp and its wholly owned subsidiaries, unless we indicate otherwise. Additionally, Valley's principal subsidiary, Valley National Bank, is commonly referred as the "Bank" in this MD&A.

The MD&A contains supplemental financial information, described in the sections that follow, which has been determined by methods other than U.S. generally accepted accounting principles ("U.S. GAAP") that management uses in its analysis of our performance. Management believes these non-GAAP financial measures provide information useful to investors in understanding our underlying operational performance, our business and performance trends and facilitates comparisons with the performance of others in the financial services industry. These non-GAAP financial measures should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP.

Cautionary Statement Concerning Forward-Looking Statements

This Quarterly Report on Form 10-Q, both in the MD&A and elsewhere, 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 and our 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 in addition to those risk factors disclosed in Valley's Annual Report on Form 10-K for the year ended December 31, 2011 include, but are not limited to:

a severe decline in the general economic conditions of New Jersey and the New York Metropolitan area;

higher than expected loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business from the recent damages to our primary markets by Hurricane Sandy;

declines in value in our investment portfolio, including additional other-than-temporary impairment charges on our investment securities;

unanticipated deterioration in our loan portfolio;

an unanticipated reduction in our "originate and sell" residential mortgage strategy or a slowdown in residential mortgage loan refinance activity;

Valley's 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);

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;

higher than expected tax rates, including increases resulting from changes in tax laws, regulations and case law;

an unexpected decline in real estate values within our market areas;

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 that may disrupt our business;

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;

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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;

our inability to promptly 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 inability to realize expected cost savings and revenue synergies from the merger of State Bancorp with Valley in the amounts or in the timeframe anticipated;

inability to retain State Bancorp's customers and employees;

lower than expected cash flows from purchased credit impaired loans; and

other unexpected material adverse changes in our operations or earnings.

Critical Accounting Policies and Estimates

Valley's accounting policies are fundamental to understanding management's discussion and analysis of its financial condition and results of operations. Our significant accounting policies are presented in Note 1 to the consolidated financial statements included in Valley's Annual Report on Form 10-K for the year ended December 31, 2011. We identified our policies on the allowance for loan losses, security valuations and impairments, goodwill and other intangible assets, and income taxes to be critical because management has to make subjective and/or complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. Management has reviewed the application of these policies with the Audit Committee of Valley's Board of Directors. Our critical accounting policies are described in detail in

Part II, Item 7 in Valley's Annual Report on Form 10-K for the year ended
December 31, 2011.

New Authoritative Accounting Guidance

See Note 4 to the consolidated financial statements for a description of new authoritative accounting guidance including the respective dates of adoption and effects on results of operations and financial condition.

Executive Summary

Company Overview. At September 30, 2012, Valley had consolidated total assets of $15.8 billion, total net loans of $11.0 billion, total deposits of $10.9 billion and total shareholders' equity of $1.5 billion. Our commercial bank operations include branch office locations in northern and central New Jersey and the New York City Boroughs of Manhattan, Brooklyn and Queens, as well as Long Island, New York. Of our current 210 branch network, 80 percent and 20 percent of the branches are located in New Jersey and New York, respectively. We have grown both in asset size and locations significantly over the past several years primarily through both bank acquisitions and de novo branch expansion, including our most recent bank transaction discussed below. See Item 1 of Valley's Annual Report on Form 10-K for the year ended December 31, 2011 for more details regarding our past merger activity.

Acquisition of State Bancorp, Inc. ("State Bancorp"). On January 1, 2012, Valley acquired State Bancorp, the holding company for State Bank of Long Island, a commercial bank with $1.7 billion in assets, $1.1 billion in loans and $1.4 billion in deposits, after purchase accounting adjustments, and 16 branches in Nassau, Suffolk, Queens, and Manhattan. We believe our expansion into this attractive area of the Long Island market has already provided additional lending, retail, and wealth management service opportunities to further strengthen our New York Metropolitan operations and will continue to grow Valley brand recognition in these markets. During February 2012, we integrated State Bancorp's systems into Valley with minimal disruption to our customer service and operations. We continue to look for future opportunities to support our new efforts in the Long Island market both through gradual de novo branch expansion and other potential bank acquisitions.

The shareholders of State Bancorp received a fixed one- for- one exchange ratio for Valley National Bancorp common stock. The total consideration for the acquisition totaled $208.4 million (approximately 17.7 million shares of Valley common stock). The transaction generated approximately $102.0 million in goodwill and $8.1 million in core deposit

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intangible assets subject to amortization. As a condition to the closing of the merger, State Bancorp redeemed $36.8 million of its outstanding Fixed Rate Cumulative Series A Preferred Stock from the U.S. Treasury. The stock redemption was funded by a $37.0 million short-term loan from Valley to State Bancorp. The loan, included in Valley's consolidated financial statements at December 31, 2011, was subsequently eliminated as of the acquisition date and is no longer outstanding. See additional details in Note 3 to the consolidated financial statements.

Quarterly Results. Net income for the third quarter of 2012 was $39.4 million, or $0.20 per diluted common share, compared to $35.4 million, or $0.20 per diluted common share for the third quarter of 2011. The $4.0 million increase in quarterly net income as compared to the same quarter one year ago was largely due to: (i) a $20.3 million increase in total non-interest income mainly caused by a $22.2 million increase in net gains on the sales of (residential mortgage) loans as we implemented an "originate and sell" model for most of our residential loan mortgage originations during the third quarter of 2012, and
(ii) a modest increase of $420 thousand in net interest income after provision for credit losses as our provision declined due to improved loss experience and outlook in mainly the auto and other consumer loan categories, partially offset by (iii) a $7.9 million increase in total non-interest expense primarily due to increases in salary and employee benefits, net occupancy and equipment expense, and other non-interest expense largely due to the acquisition of State Bancorp and certain other items and (iv) a 8.3 percent increase in our effective tax rate largely due to the increase in pre-tax income for the third quarter of 2012 and its impact on the projected income and tax rate for the full year of 2012. See the "Net Interest Income," "Other Income," "Other Expense," "Investment Securities Portfolio" and "Loan Portfolio" sections below for more details on the items impacting our third quarter of 2012 results.

Recent Events. On October 29, 2012, Hurricane Sandy struck the Northeast and caused severe property damage and many business closures throughout our primary New Jersey and New York Metropolitan area markets. We are currently assessing the impact of the storm on our borrowers' ability to repay their loans and any adverse impact on collateral values. Additionally, we implemented several "fee relief" programs to refund or waive certain service fees to customers caused by the storm. While we do not anticipate the lost revenue from the hurricane to materially impact our fourth quarter of 2012 results and subsequent periods, we can make no assurances that the on-going local area recovery and its economic toll to a broad range of our customers will not have a materially adverse effect on our future financial condition and results of operations. For more details regarding risk factors, including severe weather and climate change, that may affect Valley, see Part I, Item 1A of Valley's Annual Report on Form 10-K for the year ended December 31, 2011.

Economic Overview and Indicators. During the third quarter of 2012, the U.S. economy modestly progressed in its recovery despite significant monetary stimulus provided by the Federal Reserve. The Fed has announced its intentions to keep short term rates low, in the zero to 0.25% range, for at least the next two years in an effort to enliven economic growth. That effort is exemplified by programs such as Operation Twist and a current round of quantitative easing, known as QE3, in which the Fed intends to actively purchase approximately $85 billion per month of Treasuries and mortgage-backed securities to drive down interest rates. This action is aimed to lower borrowing costs for businesses and consumers. In the early part of the fourth quarter, we have begun to see improvements in unemployment rate and the housing market, and we anticipate that the Fed will continue its programs to sustain growth.

In terms of jobs data, the most recent monthly reports are mixed. On the surface it looked favorable, with 114 thousand jobs created in September, and there were some large revisions that added 86 thousand jobs to the two previous months. Unfortunately that showed that the economy was generating close to 200 thousand jobs per month two months ago and now new jobs are running just over 100 thousand a month, so the momentum may be slowing. A decline in non-farm payrolls appears to indicate that employers are reluctant to hire with all the uncertainty ahead and this will likely continue until Congress acts to address the so-called fiscal cliff (i.e., the combination of scheduled tax increases and cuts in federal spending set for the end of 2012). In addition, a recent household survey revealed that the unemployment rate tumbled three tenths month-to-month from 8.1 percent to 7.8 percent (the lowest rate in almost four years), but many economists say that it is because over 800 thousand people took part-time jobs for economic reasons.

On a national level, home sales and housing starts are showing some positive momentum and homebuilders are increasingly confident. Thanks in part to the Federal Reserve, mortgage rates are at multi-generational lows, giving qualified borrowers the ability to enter the market. The median price of an existing home climbed 11 percent since September 2011 to $183 thousand. Increased refinance activity has had a positive impact on our residential lending operations and to the extent that new and existing home sales grow, there will be a multiplier effect throughout the economy, improving conditions for realtors, movers, lawyers, the home furnishings industries and potentially many of our commercial customers.

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On a year-over-year basis, the producer price index reflected an increase of 2.5 percent and the consumer price index rose 1.9 percent. Both of these indexes reflect risks of inflation that should be within the Fed's comfort range and give them the flexibility for further monetary easing. Many economists expect GDP growth to be 2.1 percent for the full year 2012 (compared with 1.8 percent for 2011) and the projections for 2013 and 2014 are 2.0 percent and 2.6 percent, respectively. We believe a low-rate, high unemployment environment, which is reflective of our current operating environment, will continue to challenge our business operations and results in many ways during the remainder of 2012 and the foreseeable future, as highlighted throughout the remaining MD&A discussion below.

The following economic indicators are just a few of many factors that may be used to assess the market conditions in our primary markets of northern and central New Jersey and the New York City metropolitan area, Long Island, New York. Generally, market conditions have improved from one year ago, however, as outlined above, economic uncertainty, persistent unemployment, as well as high vacancy rates may continue to put pressure on the performance of some borrowers and the level of new loan demand within our area.

                                                                           For the Month Ended
                                     September 30,          June 30,          March 31,          December 31,          September 30,
Key Economic Indicators:                 2012                 2012              2012                 2011                  2011

Unemployment rate:
U.S.                                           7.80 %            8.20 %             8.20 %                8.50 %                 9.00 %
New York Metro Region*                         8.50 %            9.50 %             8.90 %                8.20 %                 8.60 %
New Jersey                                     9.80 %            9.60 %             9.00 %                9.10 %                 9.40 %
New York                                       8.90 %            8.90 %             8.50 %                8.20 %                 8.30 %

                                                                          Three Months Ended
                                     September 30,         June 30,          March 31,         December 31,         September 30,
                                         2012                2012              2012                2011                 2011
                                                                           ($ in millions)
Personal income:
New Jersey                                       NA       $   475,767       $   472,197       $      474,531       $       470,405
New York                                         NA       $ 1,015,341       $ 1,003,796       $      993,931       $       985,581
New consumer bankruptcies:
New Jersey                                       NA              0.14 %            0.15 %               0.16 %                0.15 %
New York                                         NA              0.09 %            0.08 %               0.10 %                0.09 %
Change in home prices:
U.S.                                             NA              6.90 %           -1.70 %              -3.80 %                0.10 %
New York Metro Region*                           NA              0.91 %           -1.78 %              -3.70 %                0.72 %
New consumer foreclosures:
New Jersey                                       NA              0.05 %            0.08 %               0.04 %                0.07 %
New York                                         NA              0.05 %            0.06 %               0.05 %                0.06 %
Rental vacancy rates:
New Jersey                                    10.80 %           10.50 %           11.60 %              10.80 %                9.50 %
New York                                       5.00 %            5.60 %            6.30 %               6.30 %                7.40 %

NA - not available

* As reported by the Bureau of Labor Statistics for the NY-NJ-PA Metropolitan Statistical Area.

Sources: Bureau of Labor Statistics, Bureau of Economic Analysis, Federal Reserve Bank of New York, S&P Indices, and the U.S. Census Bureau.

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Loans. Overall, our total loan portfolio declined by 9.6 percent on an annualized basis during the third quarter of 2012 mainly due to a substantial amount of refinance activity within our residential mortgage loan portfolio and our shift to an "originate and sell" model during the third quarter. Total non-covered loans (i.e., loans which are not subject to our loss-sharing agreements with the FDIC) decreased by $255.9 million, or 9.1 percent on an annualized basis, to $10.9 billion at September 30, 2012 from June 30, 2012 largely due to the decision to sell the majority of our new and refinanced residential mortgage loans, some large repayments within the commercial loan portfolios, as well as continued strong competition for high quality commercial borrowers. Automobile loans increased $11.1 million, or 5.7 percent on an annualized basis, during the third quarter of 2012 as compared to June 30, 2012 due, in part, to $12.4 million in purchased loans during the quarter. However, our commercial real estate loan portfolio (including construction loans) experienced organic growth of $28.6 million, or 2.4 percent on an annualized basis, during the third quarter of 2012. Total covered loans (i.e., loans subject to our loss-sharing agreements with the FDIC) decreased to $207.5 million, or 1.9 percent of our total loans, at September 30, 2012 as compared to $226.5 million at June 30, 2012 mainly due to normal payment activity.

Our new and refinanced residential mortgage loan originations of $1.5 billion during the nine months ended September 30, 2012 increased 85 percent as compared to $786 million in the same period of 2011. The increased volume is largely the result of the historically low interest rate environment, the success of our low-fixed price residential mortgage refinance programs and our strong emphasis in the New York Metro area supported by our expanded network of 43 full service branches in the New York boroughs and Long Island after the acquisition of State Bancorp on January 1, 2012. Widening loan spreads and the current Federal Reserve monetary policies contributed to increased loan sales into the secondary market during the third quarter of 2012 as we attempt to maximize mortgage banking revenues within non-interest income, while the low level of market interest rates continues to apply pressure to our net interest income and margin. As a result, Valley sold approximately $380 million of residential mortgages during the three months ended September 30, 2012 compared to $75 million in the prior quarter ended June 30, 2012, and had $149.1 million in loans held for sale, at fair value, at September 30, 2012. The increased secondary sales and mark to market gains on loans held for sale at fair value materially increased the total gains on the sale of loans recognized in our non-interest income as compared to the linked quarter and the third quarter of 2011, while allowing us to maintain the appropriate mix of earning assets and an acceptable level of interest rate risk on our balance sheet. Additionally, loan servicing rights recognized for the retained servicing of the loans sold during the third quarter totaled $4.4 million at September 30, 2012. During the early part of the fourth quarter of 2012, mortgage application volume continues to be strong, and we believe this activity will continue into the foreseeable future assuming that market conditions do not adversely change. See further details on our loan activities, including the covered loan portfolio, under the "Loan Portfolio" section below.

Asset Quality. Given the slow economic recovery, elevated unemployment levels, personal bankruptcies, and higher delinquency rates reported throughout the banking industry, we believe our loan portfolio's credit performance remained at an acceptable level at September 30, 2012. Our past due loans and non-accrual loans, discussed further below, exclude purchased credit-impaired ("PCI") loans. PCI loans include loans that were acquired as part of FDIC-assisted transactions in 2010 ("covered loans") and all loans acquired in the merger with State Bancorp on January 1, 2012 and loans purchased by Valley in March 2012. 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.

Total loans (excluding PCI loans) past due in excess of 30 days were $171.0 million, or 1.53 percent of our total loan portfolio of $11.1 billion as of September 30, 2012 compared to $157.8 million, or 1.38 percent of total loans of $11.4 billion at June 30, 2012. The increase of $13.2 million in delinquent loan balances was mainly due to increases in commercial and industrial loans and residential mortgage loans within the 30 to 89 days past due loan category. Within this past due category, commercial and industrial loans increased $15.2 million to $17.5 million at September 30, 2012 due, in part, to a $8.9 million impaired loan with $3.7 million in related specific reserves included in our total allowance for loan losses and a $4.6 million matured performing loan in the normal process of renewal. Residential mortgage loans past due 30 to 89 days also increased $6.8 million to $17.0 million at September 30, 2012; however, Valley believes the mortgage loans in this past due category are well secured, in the process of collection and do not represent a material negative trend within the residential mortgage portfolio. Non-accrual loans decreased $4.8 million to $121.4 million at September 30, 2012 as compared to $126.2 million at June 30, 2012 mainly due to declines in the

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commercial real estate and construction loan categories caused, in part, by several full loan payoffs received, and despite the addition of $3.0 million of reclassified performing residential and home equity loans to non-accrual status due to the implementation of new Office of the Comptroller of the Currency guidance during the third quarter. Loan charge-offs related to the reclassified loans were immaterial for the third quarter of 2012. Although the timing of collection is uncertain, we believe most of our non-accrual loans are well secured and, ultimately, collectible. Our lending strategy is based on underwriting standards designed to maintain high credit quality and we remain optimistic regarding the overall future performance of our loan portfolio. However, due to the potential for future credit deterioration caused by the unpredictable direction of the economy and high levels of unemployment, management cannot provide assurance that our non-performing assets will not increase from the levels reported as of September 30, 2012. See the "Non-performing Assets" section below for further discussion and analysis of our credit quality.

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Selected Performance Indictors. The following table presents our annualized performance ratios for the periods indicated:

                                                  Three Months  Ended           Nine Months  Ended
                                                     September 30,                 September 30,
                                                   2012           2011          2012           2011

Return on average assets                              0.99 %        0.99 %         0.90 %        1.02 %
Return on average shareholders' equity               10.45         10.74           9.52         11.07
Return on average tangible shareholders'
equity ("ROATE")                                     14.86         14.52          13.60         14.99

ROATE, which is a non-GAAP measure, is computed by dividing net income by average shareholders' equity less average goodwill and average other intangible assets, as follows:

                                            Three Months Ended                    Nine Months Ended
. . .
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