Strong Mortgage Banking Revenue Cannot Curtail Margin Compression at Valley National


Valley National Bancorp reported net income of $31.3 million, or $0.16 per share, in the first quarter of 2013 compared with $34.5 million, or $0.18 per share, in the first quarter of 2012. Mortgage banking originations remained strong during the quarter, resulting in $15.1 million in revenue. The net interest margin remains under pressure as yields as well as the decline in linked quarter average loans. With mortgage revenue and net interest margin offsetting each other, we are maintaining our moat rating and fair value estimate.

Residential mortgage loan originations totaled a record $577 million during the quarter, which represents a 9% increase from fourth-quarter 2012. Of the first-quarter mortgage originations, $437 million was sold for gain. Gains on sales declined to $15.1 million for first-quarter 2013 compared with $15.6 million last quarter largely due to lower pricing caused by changes in market interest rates. While we have been anticipating that the mortgage business for U.S. banks will be declining during 2013, Valley has been expanding its geography into New York and Pennsylvania in order to seek new customers and grow mortgage origination volumes. At this point, Valley expects the mortgage loan pipeline to remain strong during secondquarter 2013.

Nevertheless, we remain concerned about the potential for a decline in mortgage origination activity for Valley given that mortgage revenue comprises about half of fee revenue and approximately 11% of net revenue. Overall, total loans declined during the quarter to $10.7 billion compared with $10.9 billion last quarter as line usage in commercial loans was reduced along with strong competition for high quality commercial borrowers.

However, consumer lending categories experienced strong growth, especially automobile lending. But, it was not enough to offset the declines in commercial and residential lending balances. Although the average cost of deposits is low at 0.46%, Valley’s long-term borrowings of $2.8 billion have an average coupon of more than 4% which continues to impact the net interest margin. It is unlikely that Valley will pay the approximately $300 million to $350 million of prepayment penalties to the Federal Home Loan Bank in order to retire that debt.

Most of the net interest margin pressure is the result of yield declines on loans and securities. While net interest margin declined to 3.12% for first-quarter 2013 from 3.36% for fourth-quarter 2012, Valley anticipates that future margin compression will be about 5 to 6 basis points for second-quarter 2013. We think Valley is actively trying to maximize its net interest margin. Unfortunately, the macroeconomic environment of low interest rates continues to pressure the top line for most banks, including Valley.


Suggested Reading: Smallest Countries In the World