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If Valley National's (NYSE: VLY ) fourth-quarter, analyst-matching earnings per share of $0.19 could be summed up in one word, it'd probably be "meh." And if we look at the post-earnings market reaction, Mr. Market seems to concur. After previewing what to watch for yesterday, here are a few things that I am taking away as noteworthy from the release.
1. Record loan originations
The fourth quarter was a strong one with regards to new loan originations, with a couple of sectors experiencing record highs. Residential mortgage originations , including new loans and refinances, totaled $531 million, up a substantial 18% from the third quarter. For the full year, commercial lending was a big contributor, with the commercial and industrial segment and commercial real estate segment combining for $1.4 billion in new loan originations over the course of 2012.
Nevertheless, total non-covered loans decreased by 3.6% on an annualized basis from the third quarter , primarily driven by the bank's decision to sell the majority of new and refinanced residential loans. During the quarter, Valley sold nearly $389 million of these loans , resulting in a gain of $15.6 million. This gain, however, represents a 44% decline from the third quarter, primarily the result of a decline in mark-to-market gains.
2. Net interest income and margin
Net interest income remained relatively flat year over year despite a 33-basis-point net interest margin during the course of the year . The primary cause of the decline in net interest margin can be attributed to the increase in loan activity throughout the year occurring at gradually reducing rates. As lending rates decline, bringing down the average rate of interest on the loan portfolios, it is more important for higher interest loans to remain in a paying status to offset the difference. Unfortunately, the repayment volume on higher-yielding loans remained elevated during the fourth quarter of 2012, which helped to lower the overall yield of the loans.
Valley National offered guidance that it believes margins will continue to compress during the foreseeable future, but it also stated that some of the decline will be mitigated by careful monitoring of the cost of credit. If it manages to do so, especially in light of record loan originations, then net interest income could continue to remain flat. While not an optimal outcome, it is better than a steep decline in this very important piece of any bank's business.
3. Change in asset quality
Despite a 5.5% increase in nonperforming assets during the quarter, assets deemed "nonperforming" by the bank remain low, making up a modest 1.22% of total assets . A couple of loan categories warranted some special attention in this earnings release, and both had some noteworthy moves. Commercial real estate loans, which I noted were the largest category of non-accrual loans, remained as such, but it was the growth in past-due loans that caught my attention. On a percentage basis, the increases were huge, but those loan categories were relatively small to begin with and so the larger size of the CRE loans can make for a big increase even if its just a few loans that are having issues. Further, of the $2.95 million in loans more than 90 days past due, the bulk were loans that are matured and in the process of being renewed, so we can assume that they will be returning to performing status.
Commercial and industrial loans, the other category of interest, experienced a $10.1 million increase in the non-accrual category during the quarter, the bulk of which was caused by two distinct loans . The first loan was restructured during the quarter and has returned to performing status , while the second loan was negatively affected by Hurricane Sandy in October . These two loans alone account for most of the growth in nonperforming assets during the quarter, so one would hope that this won't be a recurring thing going forward.
Valley National hasn't wowed anyone with these results in trading today, but it doesn't mean that it was a bad quarter. In my opinion, the bank seems poised to continue along the same path it has for the past few years. Many investors like Valley National for its dividend yield of over 6.5%, and I don't expect that to change anytime soon.
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