Valley National Bancorp: Quality Prospect Worth Considering (NASDAQ:VLY)

With a market capitalization of $5.51 billion as of this writing, Valley National Bancorp (NASDAQ:VLY) is one of the larger banks that I have decided to perform a deep dive into over the past year. Over the past few years, revenue and profits for the institution have skyrocketed. There has been some weakness when you look at the picture for the 2023 fiscal year. In addition to this, the bank is not exactly the cheapest prospect on the market. However, it does look robust and healthy. For those who are value oriented who don’t need a deep value prospect, and who instead prefer a quality operator with little in the way of risk, Valley National Bancorp definitely fits the bill for consideration in my book.

A solid bank worth looking into

According to the management team at Valley National Bancorp, the institution operates as a bank holding company and financial holding company that traces its roots back to 1927. Through its banking subsidiary, the company provides a full range of banking solutions to its customers, including players in the commercial space, private banking, retail, insurance, and more. It also provides wealth management financial services products. Examples of some of its offerings include, but are not limited to, deposit and lending products, commercial real estate financing, the origination of asset-based loans, small business loans, the origination of residential mortgages and home equity lines of credit, automobile financing, and more.

The institution makes all of this possible through the 230 branches that it has in operation. 55% of these are located in New Jersey. Another 18% are in New York, with a further 18% in Florida. That leaves the remaining 9% split between Alabama, California, and Illinois. What this tells me is that, with the exception of Connecticut and Texas, Valley National Bancorp is exposed to all of the major economic centers of the country. Simultaneously, it also has exposure to smaller markets such as through Illinois.

In recent years, Valley National Bancorp has achieved a nice bit of growth. From 2020 through 2022, net interest income at the institution expanded from $993.2 million to just shy of $1.60 billion. Non-interest income managed to grow over the same window of time from $183 million to $206.8 million. And, thanks to the increase of both of these metrics, net profits managed to grow from $377.9 million to $555.7 million. When it comes to the 2023 fiscal year, data covering the first nine months shows continued expansion. Net interest income of $1.24 billion beat out the $1.14 billion reported one year earlier. Non-interest income grew from $154 million to $173 million. And net profits expanded from $381.7 million to $414.9 million.

This increase was only made possible by growth in the institution’s balance sheet. The value of loans at the bank has grown pretty significantly, climbing from $29.70 billion in 2020 to $46.92 billion in 2022. Loans continue to grow throughout the 2023 fiscal year, hitting an all-time high of $50.10 billion by the third quarter. I understand that many investors at this time are worried about exposure to office properties. As of the end of the most recent quarter, about $3.2 billion, or 6.4%, of the company’s loan exposure is to office assets. Honestly, that’s not bad. Between 2020 and 2022, the value of investment securities rose from $3.94 billion to $5.15 billion. But since then, that particular asset has flatlined. Today, that number is about $5.05 billion.

Cash, meanwhile, has been all over the map, as the chart above illustrates. This likely has to do with the decision by management to take on additional debt. For instance, from the end of last year to the end of the first quarter, debt at the bank exploded from $1.74 billion to $8.67 billion. That caused cash to grow from $947.9 million to $5.71 billion. This makes a lot of sense when you consider that the window of time we are talking about involved the banking crisis that began in early 2023. In order to prove themselves financially stable, many banks drew down on lending opportunities with the hope that those funds would not be needed. Sure enough, debt has been falling ever since. As cash has dropped to $1.14 billion, debt has declined back down to $2.47 billion.

The increase in loans and investment securities has also only been made possible by a rise in deposits. Back in 2020, Valley National Bancorp had $29.19 billion of deposits on its books. By 2022, these had grown to $47.64 billion. There was a slight decline in the first quarter of 2023 amounting to $46 million. But that was short-lived. As of the end of the third quarter, deposits were at an all-time high of $49.89 billion.

I couldn’t find any data covering uninsured deposit exposure at the end of 2022. But I do know that, from the end of the first quarter of 2023 through the end of the third quarter, the company went from having 31% of its deposits classified as uninsured to 23%. Although it would be great for this number to be lower, I have always said that I consider the threshold for a healthy institution to be exposure that is 30% or lower. So Valley National Bancorp receives a passing mark on this one.

The last metric that we should touch on is book value per share. As you can see in the chart above, both book value per share and tangible book value per share for the institution has grown rather consistently. Even during the crisis, the firm showed the ability to grow in this respect. That is definitely great to see. Now, in terms of valuing the company, it’s worth noting that the stock is trading at 85.9% of book value. Meanwhile, it’s trading at a 25.8% premium to tangible book value. I have seen some banks over the past year that are trading at a discount to both. But for the size of the institution and compared to many of the others that I have seen out there, this seems to be perfectly respectable.

The other way to value the firm is to do so in relation to earnings. If we rely on earnings from 2022, then shares of Valley National Bancorp are trading at a price to earnings multiple of 9.9. If we annualize financial results for the 2023 fiscal year, we should expect net profits of around $604 million. That would imply a slightly lower price to earnings multiple of 9.1. Both of these are below the 10.4 average that I have seen in the market. However, there are other banks that I have looked at that have price to earnings multiples that are around 6 or lower and that are also rather attractive.

Takeaway

Based on all the data provided, I must say that Valley National Bancorp strikes me as a solid institution. It’s definitely not the kind of play that’s going to generate tremendous upside. But I do think it could offer some nice, potentially market-beating, returns. Uninsured deposit exposure is solid, and the institution has a nice track record for growing both deposits and loans. All other profitability and balance sheet metrics look nice as well. Given all of these factors, I have no problem rating the bank a “Buy” at this time.