VALLEY NATIONAL BANCORP ANNUAL FORECAST MODEL ($ in thousands, except per share data) 2006A 12/31/2006 BALANCE SHEET Assets Cash and due from banks Interest bearing deposits with banks Investment securities Loans held for sale at fair value Gross loans Less - Allowance for loan losses Net loans Premises and equipment net Bank owned life insurance Accrued interest receivable Due from customers on acceptances outstanding FDIC loss-share receivable Goodwill Other intangible assets net Other assets Total Assets Liabilities Total deposits Short-term borrowings Long-term borrowings Junior subordinated debentures issued to capital trusts Bank acceptances outstanding Accrued expenses and other liabilities Total Liabilities Total Shareholders' Equity Total Liabilities and Shareholders' Equity Balance Check INVESTMENT SECURITIES Investment securities % growth LOANS Gross loans (Covered and non-covered) 8,331,685 % growth Loans held for sale Loans held for sale as % of gross loans CREDIT LOSS RESERVE Allowance for credit losses - BOP 75,188 Plus: Net charge-offs (enter as -) (9,740) Plus: Provision for credit losses (enter as +) 9,270 Plus: Acquisitions 0 Allowance for loan losses (reserves) - EOP 74,718 Plus: Allowance for letter of credit
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VALLEY NATIONAL BANCORP ANNUAL FORECAST MODEL($ in thousands, except per share data)
2006A 2007A12/31/2006 12/31/2007
BALANCE SHEETAssetsCash and due from banksInterest bearing deposits with banksInvestment securitiesLoans held for sale at fair valueGross loans Less - Allowance for loan lossesNet loansPremises and equipment netBank owned life insuranceAccrued interest receivableDue from customers on acceptances outstandingFDIC loss-share receivableGoodwillOther intangible assets netOther assetsTotal AssetsLiabilitiesTotal depositsShort-term borrowingsLong-term borrowingsJunior subordinated debentures issued to capital trustsBank acceptances outstandingAccrued expenses and other liabilitiesTotal LiabilitiesTotal Shareholders' EquityTotal Liabilities and Shareholders' EquityBalance Check
LOANSGross loans (Covered and non-covered) 8,331,685 8,496,221 % growth 1.97%
Loans held for saleLoans held for sale as % of gross loans
CREDIT LOSS RESERVEAllowance for credit losses - BOP 75,188 74,718 Plus: Net charge-offs (enter as -) (9,740) (11,658)Plus: Provision for credit losses (enter as +) 9,270 11,875 Plus: Acquisitions 0 0 Allowance for loan losses (reserves) - EOP 74,718 74,935 Plus: Allowance for letter of credit 2,271
C10
Wall Street Prep: Aggregate all investment securities into one line item
C12
Wall Street Prep: Include 2010 covered loans
C37
WSP: Historical balances from p.57 VLY 10K
C41
Wall Street Prep: Historical data: VLY 10K p.63
C48
Wall Street Prep: Historical data: VLY 10K p. 70
C53
Wall Street Prep: Historical data: VLY 10K p. 70
Reported Allowance 74,718 72,664
DriversNCO to prior year provision 125.76% Average loans 8,262,739 8,261,111 NCO / average loans (includes loans held for sale) (0.12%) (0.14%)
FDIC LOSS SHARE RECEIVABLEFDIC loss share receivable - BOPNet reimbursementFDIC loss share receivable - EOP
DEPOSITSGross loans - EOP 8,331,685 8,496,221 Deposits - EOP 8,487,651 8,091,004 Ratio of gross loans / deposits 98.16% 105.01%
DEBTLong-term borrowingsas a % of gross loans
NET INTEREST INCOME (NII)Balance sheet itemsLoans - EOPInvestments - EOPFederal funds sold and other interest bearing deposits - EOPTotal interest earning assets - EOPTotal interest earning assets - Average
% of total deposits that are interest bearing 74% Interest earning deposits - EOPST borrowings - EOPLT borrowings - EOPJunior subordinated debentures issued to capital trustsTotal interest bearing liabilities - EOPTotal interest bearing liabilities - Average
Net interest income (NII) calculationTotal interest incomeTotal interest expenseNet Interest Income (NII) - reported Tax equivalent adjustment
C58
Wall Street Prep: Historical balances from VLY 10K, p. 43 and/or p. 70
C62
Wall Street Prep: Historical balance, VLY 10K p.124
C68
Wall Street Prep: Historical balances from VLY 10k, p. 30
C81
Wall Street Prep: Historical IEA averages disclosed in VLY's 10K p.42. Caution: Reported average IEA will not equal model-calculated IEA on a historical basis because reported averages are computed daily.
D83
WSP: Based on 2010 ratio of interest bearing deposits to total deopsits, VLY 10k p. 43
C89
Wall Street Prep: Historical IBL averages disclosed in VLY's 10K p.42. Caution: Reported average IBL will not equal model-calculated IBL on a historical basis because reported averages are computed daily.
C106
Wall Street Prep: VLY 10k p.43
NII - tax equivalent basis
Net interest margin (NIM) - NII/Average IEA
INCOME STATEMENTInterest incomeTotal interest incomeTotal interest expense Net Interest Income
Provision for credit losses
Non-Interest IncomeTrust and investment servicesInsurance commissionsService charges on deposit accountsSecurities gains/lossesTrading (losses) gains netFees from loan servicingBank owned life insuranceChange in FDIC loss-share receivableOther income, including gains on sale of loans, assets, and Total non-interest income
Non-Interest ExpenseSalary and employee benefits expenseNet occupancy and equipment expenseAmortization of other intangible assetsOtherTotal non-interest expense
Income Before Income TaxesIncome tax expenseNet IncomeDividends on preferred stock and accretionNet Income Available to Common Stockholders
Weighted Average Number of Common Shares OutstandingBasic (#)Diluted (#)
Earnings Per Common ShareBasic (actual)Diluted (actual)
Cash dividends per common shareCash dividends
Income Statement drivers% growth (year-over-year)Trust and investment services Insurance commissionsBank owned life insurance
Other non-interest income
Other driversService charges on deposit accounts / BOP depositsFees from loan servicing / BOP gross loans
As % of NIISalary and employee benefits expenseNet occupancy and equipment expenseAmortization of other intangible assetsOther non-interest expense
Tax rate
CASH, DEPOSITS WITH BANKS, AND SHORT TERM BORROWINGSCash and due from banksCash as % of deposits
Total assets (including prior year interest bearing deposits)Total liabilities & equity (including prior year ST borrowings)Funding needs (surplus)
CIRCULARITY
1=Use beginning balance to calculate NII 12=Use average balance to calculate NII (creates circularity)
Circularity breaker: Off (Default)
CAPITAL REQUIREMENTSTier 1 CapitalTotal stockholders' equityLess: GoodwillPlus: Junior subordinated debentures issued to capital trustsPlus: OtherTier 1 Capital
Total CapitalTier 1 capitalPlus: Allowance for credit losses - EOPPlus: Qualifying sub debtTotal capital
Risk weighted assets (RWA)Average Interest earning assets (IEA)Average total assets
DriversRWA / IEAAverage total assets / IEA
Tier 1 capital ratio (Tier 1 / RWA) 10.56% 9.55% Total capital ratio (Total capital / RWA) 12.44% 11.35%
D184
Wall Street Prep: NII is calculated using the average IEA and IBL balances during the period. However, this creates a circularity because then NII affects retain earnings, which in turn, affects the model balancers (interest bearing deposits and ST borrowings), which, in turn affect the NII, creating the circularity. You can avoid this by calculating NII using BOP IEA and IBL balances (select 1 from the dropdown menu). In an annual model, this can be dangerous if balances are expected to change substantially during the year. In this event, use average balances and employ a circularity breaker.
D187
Wall Street Prep: Whenever you intentionally introduce circularity in the model, you need to include a circuit “breaker” in the event that your model becomes unstable and “blows up”. A circularity breaker ensures that if the model becomes unstable because of the circularity, you can "reset" the model to its prior state, by selecting ‘On’ from the dropdown menu. Through the use of an IF statement, this has the effect of zeroing out the cells that are creating the circularity, in this case, interest income, and interest expense. Once the instability is flushed out, the circularity breaker should be placed back to the ‘Off (Default)’ position.
C193
Wall Street Prep: historical balance per VLY's 2010 10K p.137
C195
Wall Street Prep: historical balance per VLY's 2010 10K p.153
C201
Wall Street Prep: historical balance per VLY's 2010 10K p.153
C211
Wall Street Prep: historical ratios per VLY's 2010 10K p.30
C212
Wall Street Prep: historical ratios per VLY's 2010 10K p.30
Leverage ratio (Tier 1 / average total assets) 8.10% 7.62%
Capital checkTier 1 capital ratio (Tier 1 / RWA) Well capitalized Well capitalized
Total capital ratio (Total capital / RWA) Well capitalized Well capitalized
Leverage ratio (Tier 1 / average total assets) Well capitalized Well capitalized
C213
Wall Street Prep: historical ratios per VLY's 2010 10K p.30
Well capitalized Well capitalized Well capitalized Well capitalized Well capitalized Well capitalized Well capitalized
Well capitalized Well capitalized Well capitalized Well capitalized Well capitalized Well capitalized Well capitalized
Well capitalized Well capitalized Well capitalized Well capitalized Well capitalized Well capitalized Well capitalized
Notes
See scheduleSee schedule. Primarily with the NY Fed; model balancerSee scheduleSee scheduleSee scheduleSee scheduleSee scheduleStraight-line (SL) projection assumes new purchases equal depreciation/salesSL. Assume appreciation offset by benefit proceeds. BOLI BOP + Change in surrender value (IS income) - Benefit proceeds (CFS investing inflow) = BOLI EOP. SL. Argument can be made to grow as % of total interest income (as interest increases, so would the associated receivables).SL. Primarily used in the trade of goods. For example, a manufacturer needs to be paid by a retailer: The retailer's bank, under certain financial conditions between the bank and its customer, accepts to pay for the goods. The bank is substituting its creditworthiness for that of its customer in order to assure the manufacturer of payment after shipping the goods. The acceptance is then sent to the manufacturer. The bank records a liability (it owes the manufacturer $ now, but it records a corresponding asset that will be paid back by its customer, the retailer.See schedule. SL. No amortization of GW; assume no substantial new purchases or impairmentsSL. Assume new purchases equal amortization/salesSL. Comprised primarily of net deferred tax assets, federal reserve and federal home loan bank stock, derivatives, foreclosed and other assets. (The Federal Reserve Banks issue shares of stock to member banks. However, owning Federal Reserve Bank stock is quite different from owning stock in a private company. The Federal Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the system. The stock may not be sold or traded or pledged as security for a loan; dividends are, by law, limited to 6 percent per year)
See scheduleSee schedule; Primarily repos for VLY; model balancerSee scheduleSL. Holding company debt.SL. See corresponding asset description above.SL. Argument can be made to grow as % of non-interest expense on IS
BOP + Net income - dividends = EOP
Comprised of held to maturity; available for sale; and trading securities. Banks always disclose their investment composition in the footnotes; a large portion of VLY's securities are RMBS. Difficult to project growth rates definitively. We use historical rates as guide,
2010 gross loans include loans covered by the FDIC in a 2010 loss-share arrangement. We use a historical cagr to project loan growth. This projection will also affect our deposit liabilities, which are needed to support loan volume. VLY discloses the composition of its loan portfolio in the footnotes, so if analysts have conviction about particular loan portfolios (residential vs. commercial loans) as more detailed analysis can be performed.
Use the historical relationship as a guide
Reference prior period ending balanceProject based on ratio of NCO/prior year provision. NCO are comprised of charge-offs, net of recoveries of previously charged off loans. Our assumption for reduction in provision assumes continued normalization of credit environment to pre-crisis levels. Assume 0
Straight-line
During credit crisis in 2008 and 2009, NCOs were higher than prior period provisions. Larger provisions were then taken in 2009 and 2010, while NCOs declined as environment normalized. We are assuming normalization of provisions, and thus the relationship between NCOs and prior period provisions are also expected to increase to historical, pre-crisis levels.
Although not used directly in our analysis, the "NCO ratio" is a sanity-check
We use historical reimbursement as a guide.BOP + accretion and increase due to impairment of covered loans - FDIC reimbursements = EOP.
Deposits drive the amount of loans a bank can make, and VLY maintains an internal limitation on loans at 120% of deposits. For projection purposes, we use the historical relationship, to project deposits.
Reference LHFS and Gross Loans from schedule above.Reference Investment Securities from schedule above.Reference from the BS; projections will be zero until this balance sheet item is filled out later
Adjust total BS deposits by interest earning deposits assumption. Reference from the BS; projections will be zero until this balance sheet item is projected later.Reference from the LT Debt schedule above.Reference from the BS; projections will be zero until this balance sheet item is filled out later
Sum of NIS and IBL cost. Implies higher LT rates but at lower rate of increase than ST ratesThesis: Fed rate hikes will lead to higher ST rates, which will translate to higher deposit rates for VLY. While VLY can determine its own deposit rates, competition ties it to market conditions.Thesis: Expectations of an economic slowdown will lead to slight flattening of the yield curve (spreads between LT and ST rates will contract). Given that deposits are ST while loans are LT, this will lead to contraction in NII margin.
Reference to IS Reference to IS Reference to IS Many banks have tax exempt investments, which, due to lower yields (but lower taxes) can obfuscate comparability of NII and NIM. Accordingly, VLY, like most banks and consistent with SEC rules, disclose amounts related to NII and NIM on a tax equivalent basis using a 35 percent tax rate for the purposes of comparability.
Reference from scheduleReference from schedule
Reference from schedule
See IS drivers scheduleSee IS drivers scheduleSee IS drivers scheduleGains/Losses on securities transactions, less impairment losses on securities recognized in earnings; can't predictUnder US GAAP, unrealized trading gains/losses are recorded in IS; can't predictSee IS drivers scheduleSee IS drivers scheduleChange in impairment / accretion of FDIC covered loans; can't predictSee IS drivers schedule
See IS drivers scheduleSee IS drivers scheduleSee IS drivers scheduleSee IS drivers schedule
See IS drivers schedule
Historical payments associated with TARP - VLY has repaid its obligation. Assume 0.
SLSL
Historical trendsHistorical trendsAssumption
Assumption
Declining due to stricter regulations. VLY expects trend to stabilize and possibly reverse. We use BOP to avoid circularity.Historical trends. We use BOP to avoid circularity.
If A>L+E, our model has projected more assets than L+E to support them. As a result, ST borrowings must increase to meet funding needs. Conversely, if A<L, our model is projecting larger sources of capital (L+E) than we are using. As a result, interest-bearing deposits must increase to put the excess capital "somewhere".
Tier 1 capital consists of common shareholders’ equity excluding goodwill, plus eligible long-term borrowing related to VNB CapitalReference from balance sheetReference from balance sheetUse the face value of the securities (as opposed to the carring value of the debentures) for Tier I capital calculations. Under the Dodd-Frank Act (signed 7/10), VLY's outstanding trust preferred securities will continue to count as Tier 1 capital but VLY will be unable to issue replacement or additional trust preferred securities, which would count as Tier 1 capital.Assume 0
Total capital = Tier 1 capital, "qualifying" subordinated debt and the allowance for credit losses (up to 1.25% of RWA).
Reference from credit loss reserve scheduleCalculate historicals as a plug. Forecast by using historical trends.
Does not equal average balance sheet assets because of minor adjustments for regulatory capital calculation purposes
Use historical trends as a guideUse historical trends as a guide
SL. Assume appreciation offset by benefit proceeds. BOLI BOP + Change in surrender value (IS income) - Benefit proceeds (CFS investing inflow) = BOLI EOP. SL. Argument can be made to grow as % of total interest income (as interest increases, so would the associated receivables).SL. Primarily used in the trade of goods. For example, a manufacturer needs to be paid by a retailer: The retailer's bank, under certain financial conditions between the bank and its customer, accepts to pay for the goods. The bank is substituting its creditworthiness for that of its customer in order to assure the manufacturer of payment after shipping the goods. The acceptance is then sent to the manufacturer. The bank records a liability (it owes the manufacturer $ now, but it records a corresponding asset that will be paid back by its customer, the retailer.
SL. Comprised primarily of net deferred tax assets, federal reserve and federal home loan bank stock, derivatives, foreclosed and other assets. (The Federal Reserve Banks issue shares of stock to member banks. However, owning Federal Reserve Bank stock is quite different from owning stock in a private company. The Federal Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the system. The stock may not be sold or traded or pledged as security for a loan; dividends are, by law, limited to 6 percent per year)
Comprised of held to maturity; available for sale; and trading securities. Banks always disclose their investment composition in the footnotes; a large portion of VLY's securities are RMBS.
We use a historical cagr to project loan growth. This projection will also affect our deposit liabilities, which are needed to support loan volume. VLY discloses the composition of its loan portfolio in the footnotes, so if analysts have conviction about particular loan portfolios (residential vs. commercial loans) as more detailed analysis can be performed.
Project based on ratio of NCO/prior year provision. NCO are comprised of charge-offs, net of recoveries of previously charged off loans. Our assumption for reduction in provision assumes continued normalization of credit environment to pre-crisis levels.
During credit crisis in 2008 and 2009, NCOs were higher than prior period provisions. Larger provisions were then taken in 2009 and 2010, while NCOs declined as environment normalized. We are assuming normalization of provisions, and thus the relationship between NCOs and prior period provisions are also expected to increase to historical, pre-crisis levels.
Deposits drive the amount of loans a bank can make, and VLY maintains an internal limitation on loans at 120% of deposits. For projection purposes, we use the historical relationship, to project deposits.
Thesis: Fed rate hikes will lead to higher ST rates, which will translate to higher deposit rates for VLY. While VLY can determine its own deposit rates, competition ties it to market conditions.Thesis: Expectations of an economic slowdown will lead to slight flattening of the yield curve (spreads between LT and ST rates will contract). Given that deposits are ST while loans are LT, this will lead to contraction in NII margin.
Many banks have tax exempt investments, which, due to lower yields (but lower taxes) can obfuscate comparability of NII and NIM. Accordingly, VLY, like most banks and consistent with SEC rules, disclose amounts related to NII and NIM on a tax equivalent basis using a 35 percent tax rate for the purposes of comparability.
Gains/Losses on securities transactions, less impairment losses on securities recognized in earnings; can't predict
Declining due to stricter regulations. VLY expects trend to stabilize and possibly reverse. We use BOP to avoid circularity.
If A>L+E, our model has projected more assets than L+E to support them. As a result, ST borrowings must increase to meet funding needs. Conversely, if A<L, our model is projecting larger sources of capital (L+E) than we are using. As a result, interest-bearing deposits must increase to put the excess capital "somewhere".
Tier 1 capital consists of common shareholders’ equity excluding goodwill, plus eligible long-term borrowing related to VNB Capital
Use the face value of the securities (as opposed to the carring value of the debentures) for Tier I capital calculations. Under the Dodd-Frank Act (signed 7/10), VLY's outstanding trust preferred securities will continue to count as Tier 1 capital but VLY will be unable to issue replacement or additional trust preferred securities, which would count as Tier 1 capital.
Total capital = Tier 1 capital, "qualifying" subordinated debt and the allowance for credit losses (up to 1.25% of RWA).
Does not equal average balance sheet assets because of minor adjustments for regulatory capital calculation purposes
SL. Primarily used in the trade of goods. For example, a manufacturer needs to be paid by a retailer: The retailer's bank, under certain financial conditions between the bank and its customer, accepts to pay for the goods. The bank is substituting its creditworthiness for that of its customer in order to assure the manufacturer of payment after shipping the goods. The acceptance is then sent to the manufacturer. The bank records a liability (it owes the manufacturer $ now, but it records a corresponding asset that will be paid back by its customer, the retailer.
SL. Comprised primarily of net deferred tax assets, federal reserve and federal home loan bank stock, derivatives, foreclosed and other assets. (The Federal Reserve Banks issue shares of stock to member banks. However, owning Federal Reserve Bank stock is quite different from owning stock in a private company. The Federal Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the system. The stock may not be sold or traded or pledged as security for a loan; dividends are, by law, limited to 6 percent per year)
We use a historical cagr to project loan growth. This projection will also affect our deposit liabilities, which are needed to support loan volume. VLY discloses the composition of its loan portfolio in the footnotes, so if analysts have conviction about particular loan portfolios (residential vs. commercial loans) as more detailed analysis can be performed.
During credit crisis in 2008 and 2009, NCOs were higher than prior period provisions. Larger provisions were then taken in 2009 and 2010, while NCOs declined as environment normalized. We are assuming normalization of provisions, and thus the relationship between NCOs and prior period provisions are also expected to increase to historical, pre-crisis levels.
Thesis: Expectations of an economic slowdown will lead to slight flattening of the yield curve (spreads between LT and ST rates will contract). Given that deposits are ST while loans are LT, this will lead to contraction in NII margin.
Many banks have tax exempt investments, which, due to lower yields (but lower taxes) can obfuscate comparability of NII and NIM. Accordingly, VLY, like most banks and consistent with SEC rules, disclose amounts related to NII and NIM on a tax equivalent basis using a 35 percent tax rate for the purposes of comparability.
If A>L+E, our model has projected more assets than L+E to support them. As a result, ST borrowings must increase to meet funding needs. Conversely, if A<L, our model is projecting larger sources of capital (L+E) than we are using. As a result, interest-bearing deposits must increase to put the excess capital "somewhere".
Use the face value of the securities (as opposed to the carring value of the debentures) for Tier I capital calculations. Under the Dodd-Frank Act (signed 7/10), VLY's outstanding trust preferred securities will continue to count as Tier 1 capital but VLY will be unable to issue replacement or additional trust preferred securities, which would count as Tier 1 capital.
SL. Primarily used in the trade of goods. For example, a manufacturer needs to be paid by a retailer: The retailer's bank, under certain financial conditions between the bank and its customer, accepts to pay for the goods. The bank is substituting its creditworthiness for that of its customer in order to assure the manufacturer of payment after shipping the goods. The acceptance is then sent to the manufacturer. The bank records a liability (it owes the manufacturer $ now, but it records a corresponding asset that will be paid back by its customer, the retailer.
SL. Comprised primarily of net deferred tax assets, federal reserve and federal home loan bank stock, derivatives, foreclosed and other assets. (The Federal Reserve Banks issue shares of stock to member banks. However, owning Federal Reserve Bank stock is quite different from owning stock in a private company. The Federal Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the system. The stock may not be sold or traded or pledged as security for a loan; dividends are, by law, limited to 6 percent per year)
We use a historical cagr to project loan growth. This projection will also affect our deposit liabilities, which are needed to support loan volume. VLY discloses the composition of its loan portfolio in the footnotes, so if analysts have conviction about particular loan portfolios (residential vs. commercial loans) as more detailed analysis can be performed.
During credit crisis in 2008 and 2009, NCOs were higher than prior period provisions. Larger provisions were then taken in 2009 and 2010, while NCOs declined as environment normalized. We are assuming normalization of provisions, and thus the relationship between NCOs and prior period provisions are also expected to increase to historical, pre-crisis levels.
Use the face value of the securities (as opposed to the carring value of the debentures) for Tier I capital calculations. Under the Dodd-Frank Act (signed 7/10), VLY's outstanding trust preferred securities will continue to count as Tier 1 capital but VLY will be unable to issue replacement or additional trust preferred securities, which would count as Tier 1 capital.
SL. Primarily used in the trade of goods. For example, a manufacturer needs to be paid by a retailer: The retailer's bank, under certain financial conditions between the bank and its customer, accepts to pay for the goods. The bank is substituting its creditworthiness for that of its customer in order to assure the manufacturer of payment after shipping the goods. The acceptance is then sent to the manufacturer. The bank records a liability (it owes the manufacturer $ now, but it records a corresponding asset that will be paid back by its customer, the retailer.
SL. Comprised primarily of net deferred tax assets, federal reserve and federal home loan bank stock, derivatives, foreclosed and other assets. (The Federal Reserve Banks issue shares of stock to member banks. However, owning Federal Reserve Bank stock is quite different from owning stock in a private company. The Federal Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the system. The stock may not be sold or traded or pledged as security for a loan; dividends are, by law, limited to 6 percent per year)
SL. Comprised primarily of net deferred tax assets, federal reserve and federal home loan bank stock, derivatives, foreclosed and other assets. (The Federal Reserve Banks issue shares of stock to member banks. However, owning Federal Reserve Bank stock is quite different from owning stock in a private company. The Federal Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the system. The stock may not be sold or traded or pledged as security for a loan; dividends are, by law, limited to 6 percent per year)
VALLEY NATIONAL BANCORP DDM MODEL($ in thousands, except per share data)
DDM GENERAL ASSUMPTIONSDDM model type 3 stageValuation date 12/31/2010 <-- For simplicity of calculating present values, model assumes valuation date = last fiscal year end date. Analysts should adjust the present value calculations to handle other dates .
Cost of equity 9.0%
DDM - MATURITY PHASE ASSUMPTIONSROE 9.0% <-- Should converge with cost of equity as company reaches maturity. When ROE is significantly higher than cost of equity at the maturity phase, analyst needs to justify or change
RWA growth 4.0% Capital ratio (Tier 1 capital / RWA) 10.0%
Total stockholder's equity - BOPPlus: Net income to commonLess: DividendsTotal stockholders' equity - EOP 1,252,854
Less: Goodwill (296,424)Plus: Junior subordinated debentures issued to capital trusts 176,313 Plus: Other 5,545 Tier 1 Capital - EOP 1,138,288
ROE (Net income to common / Shareholders' equity)Average RWA 10,698,195
% growthCapital ratio (Tier 1 capital / RWA) 10.64%
Minimum capital ratio
DDM PV CALCS - DEVELOPMENT AND MATURITY PHASESDividends
Discount factor (assumes midyear adjustment)PV of dividends
DDM TERMINAL VALUE CALCS SHARES OUTSTANDINGBasic shares outstanding
Long term dividends growth rate 0.27% Current share priceTerminal year dividends (t+1) 129,459 Cost of equity 9.03% OptionsTerminal value (TV) 1,477,094 # exercisable
772,348 Tranche 1 115 Tranche 2 467
<-- The 3 stage is common for bank DDM models, 1)
PV of TV - Perpetuity approach
C47
Wall Street Prep: Instead of arbitrarily inputting a long term perpetuity growth rate, we can arrive at it logically, based on the projections we have already made, and keeping in mind the following: growth rate = reinvestment rate (RR) x ROE RR = (1 - payout ratio) Assuming a constant payout ratio thus enables us to calculate the perpetual g.
<-- For simplicity of calculating present values, model assumes valuation date = last fiscal year end date. Analysts should adjust the present value calculations to handle other dates .
<-- Should converge with cost of equity as company reaches maturity. When ROE is significantly higher than cost of equity at the maturity phase, analyst needs to justify or change
SHARES OUTSTANDING 1=Use beginning balance to calculate NII161,589 Front cover of latest filing 2=Use average balance to calculate NII (creates circularity)
$13.70 Share price as of valuation date
exercise price # in the $
$15 0 $17 0
<-- The 3 stage is common for bank DDM models, 1) Development: Reference the operating model, 2) Maturity: Mature ROE and RWA assumptions, and 3) Terminal: A final phase
Maturity phase133,028 NI = Average Equity * ROE. Circularity created because NI affects equity, which in turn determines NI.
(7.3%)129,116 Forecast as the excess of available capital over a minimum capital base defined by the Tier I capital ratio
(7.5%)97.1%
1,473,182 133,028
(129,116)1,477,094 (317,891)176,313
0 1,335,516 Tier 1 capital sets the base floor for capital in this model. Dividends will be distributed until the tier I capital level reaches its minimum assumption.
9.0% Maturity phase formula "smooths" shift to the maturity phase assumption.
13,355,160 4.0% Maturity phase formula "smooths" shift to the maturity phase assumption.
10.00% 10.00% Maturity phase formula "smooths" shift to the maturity phase assumption.
129,116
52%
12=Use average balance to calculate NII (creates circularity)
Tier 1 capital sets the base floor for capital in this model. Dividends will be distributed until the tier I capital level reaches its minimum assumption.
VALLEY NATIONAL BANCORP RESIDUAL INCOME MODEL($ in thousands, except per share data)
RI GENERAL ASSUMPTIONSRI model type 3 stageValuation date 12/31/2010 <-- For simplicity of calculating present values, model assumes valuation date = last fiscal year end date. Analysts should adjust the present value calculations to handle other dates .
Cost of equity 9.0%
RI - MATURITY PHASE ASSUMPTIONSROE 9.0% <-- Should converge with cost of equity as company reaches maturity. When ROE is significantly higher than cost of equity at the maturity phase, analyst needs to justify or change
RWA growth 4.0% Capital ratio (Tier 1 capital / RWA) 10.0%
Total stockholder's equity - BOPPlus: Net income to commonLess: DividendsTotal stockholders' equity - EOP 1,252,854
Less: Goodwill (296,424)Plus: Junior subordinated debentures issued to capital trusts 176,313 Plus: Other 5,545 Tier 1 Capital - EOP 1,138,288
ROE (Net income to common / Shareholders' equity)Average RWA 10,698,195
% growthCapital ratio (Tier 1 capital / RWA) 10.64%
Minimum capital ratio
RI PV CALCS - DEVELOPMENT AND MATURITY PHASES
Residual Income
Discount factor (assumes midyear adjustment)PV of RI
TERMINAL VALUE (TV) SHARES OUTSTANDINGTerminal year net income (t+1) 133,382 Basic shares outstandingTerminal year RI 0 Current share priceCost of equity 9.03%Long term RI growth rate 0.00% OptionsTerminal value (TV) 0 # exercisable
PV of TV 0.0 Tranche 1 115
<-- The 3 stage is common for bank RI models, 1)
Tranche 2 467 VALUATION Tranche 3 490 Book value of equity (last historical year) 1,295,205 Tranche 4 508 PV of RI 154,747 Tranche 5 1,145 PV of TV 0 Total options 2,724 Fair equity value of VLY 1,449,952 Implied P/BV 1.1x Treasury stock method Implied P/TBV 1.3x Option proceedsVLY value / share $8.97 Repurchased shares
Dilutive impact of stock options
VLY diluted shares outstanding:
DDM SENSITIVITY
Share price sensitivity to cost of equity (vertical) and ROE (horizontal)ROE
<-- For simplicity of calculating present values, model assumes valuation date = last fiscal year end date. Analysts should adjust the present value calculations to handle other dates .
<-- Should converge with cost of equity as company reaches maturity. When ROE is significantly higher than cost of equity at the maturity phase, analyst needs to justify or change
1=Use beginning balance to calculate NIISHARES OUTSTANDING 2=Use average balance to calculate NII (creates circularity)
161,589 Front cover of latest filing
$13.70 Share price as of valuation date
exercise price # in the $
$15 0
<-- The 3 stage is common for bank RI models, 1) Development: Reference the operating model, 2) Maturity: Mature ROE and RWA assumptions, and 3) Terminal: A final phase
Maturity phase133,028 NI = Average Equity * ROE. Circularity created because NI affects equity, which in turn determines NI.
(7.3%)129,116 Forecast as the excess of available capital over a minimum capital base defined by the Tier I capital ratio
(7.5%)97.1%
1,473,182 133,028
(129,116)1,477,094 (317,891)176,313
0 1,335,516 Tier 1 capital sets the base floor for capital in this model. Dividends will be distributed until the tier I capital level reaches its minimum assumption.
9.0% Maturity phase formula "smooths" shift to the maturity phase assumption.
13,355,160 4.0% Maturity phase formula "smooths" shift to the maturity phase assumption.
10.00% 10.00% Maturity phase formula "smooths" shift to the maturity phase assumption.
(177)
52%
12=Use average balance to calculate NII (creates circularity)
Tier 1 capital sets the base floor for capital in this model. Dividends will be distributed until the tier I capital level reaches its minimum assumption.
VALLEY NATIONAL BANCORP COST OF EQUITY($ in thousands, except per share data)
Date10-Year US Treasury (Risk-Free Rate): 3.50% 3/1/2011Market risk premium 7.00% 3/1/2011Beta 0.79 3/1/2011Cost of equity (using VLY's historical beta) 9.03%
SourceBloombergMorningstar - Ibbotson and Sinquefield YearbookBloomberg
CommentsThe football field is a valuation matrix that identifies a value range across multiple valuation methods. In addition to the RI and DDM methods, we also include a 52 week trading high and low range, as well as a peer-group derived valuation using an LTM P/B range.
To create a football field, we reference the valuation ranges from the appropriate areas of the model and calculate an average valuation for each valuation method.
Next, we lay out the ranges in a way that will be Excel chart friendly: Starting with the low valuation as a baseline, we calculate two percentiles:0-50% and 50-100%, representing the tails around the average value.
We can now insert a stacked column bar chart. Remove the fill from the low valuation stack and you have a football field.
CommentsThe football field is a valuation matrix that identifies a value range across multiple valuation methods. In addition to the RI and DDM methods, we also include a 52 week trading high and low range, as well as a peer-group derived valuation using an LTM P/B range.
To create a football field, we reference the valuation ranges from the appropriate areas of the model and calculate an average valuation for each valuation method.
Next, we lay out the ranges in a way that will be Excel chart friendly: Starting with the low valuation as a baseline, we calculate two percentiles:0-50% and 50-100%, representing the tails around the average value.
We can now insert a stacked column bar chart. Remove the fill from the low valuation stack and you have a football field.