Valley National Bancorp (NYSE: VLY) is a bank holding company that operates commercial banking operations in New Jersey and New York City. Its three operating segments are consumer lending, commercial lending, and investment management; commercial lending is its largest segment by assets with $107.6 million. In the wake of the 2008 financial crisis, VLY faces unfamiliar challenges as the credit market remains uncertain and the Dodd-Frank Act changes the financial sector.
In 2010, net income increased to $131.2 million from $116.1 million in 2009. The primary drivers of this increase were an increase in both loan volume and net interest margin from 2009; the net interest margin widened because, while its interest payable to deposit holders decreased with the Federal Funds rate, its interest income from loans issued was less dynamic and did not decrease in a similar manner.
Valley's primary source of revenue is its lending practice - like any commercial bank, VLY pays customers interest on their deposits so that it can lend out their money at a higher rate. The net interest margin metric acts as proxy for the bank's ability to earn interest on its assets. In the midst of credit market uncertainty following the 2008 Financial crisis, Valley's ability to lend profitably may be reduced and its net interest margin may decrease. VLY increased its net interest margin from 2009 to 2010 because it was able to reduce interest payments to deposit holders while holding loan interest income stable.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, the government's response to the 2008 financial crisis, significantly impacts the way the financial sector operates. Its allowance for government support of institutions identified as "too big to fail" may increase the value of identified financial institutions while decreasing the prospects and equity value of smaller financial institutions like Valley. In addition, the Act increases financial regulation which may restrict Valley's operations and increase back office expenses related to compliance.
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