FIN 3310 Module 8 Final Project: How Rates and Credit Are Reshaping Valley National Bancorp Example

Paying More for Deposits, Reserving More for Loans: Financial Factors at Valley National Bancorp, 2022-2024

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B.S.B.A. in Finance, Thomas Edison State University

FIN-3310: Financial Institutions and Markets

Mentor Name

Month Day, Year

Paying More for Deposits, Reserving More for Loans: Financial Factors at Valley National Bancorp, 2022-2024

The Firm

Valley National Bancorp is the holding company for Valley Bank, which operates branches mainly in New Jersey, New York, Florida and Alabama and serves businesses and consumers. Like most regional banks, it earns most of its revenue from the spread between interest on loans and securities and interest paid on deposits and borrowings, and commercial real estate is a large part of its loan book. All figures below come from its annual reports on Form 10-K (Valley National Bancorp, 2025).

Interest Rates and the Margin

The Federal Reserve's rate increases of 2022 and 2023 raised the bank's interest income by about 70 percent as loans and securities repriced. But interest expense rose more than fivefold, as depositors moved money from non-interest-bearing accounts into higher-paying certificates and money market accounts, and as the bank competed with money market funds for funds. By 2024, the bank was paying out more than half of its interest income to depositors and lenders, against about one-sixth in 2022. Net interest income, the core of its earnings, was flat to slightly lower. This is the liability-sensitive pattern Mishkin and Eakins (2018) describe: when a bank's liabilities reprice faster than its assets, rising rates squeeze its margin.

Non-interest-bearing deposits, the cheapest funding, were about $11.4 billion at the end of 2024, roughly 23 percent of total deposits of $50.1 billion. Keeping that share stable has been one of the bank's main defenses.

Mishkin and Eakins (2018) describe this as interest rate risk measured by the gap between rate-sensitive assets and rate-sensitive liabilities. A bank whose liabilities reprice faster than its assets is liability-sensitive: rising rates squeeze its margin until its loans and securities catch up. Valley's figures show that pattern clearly, because net interest income stayed roughly flat while both its income and its expense rose sharply, and its margin depended on how long it could hold depositors in low-cost accounts.

Credit Risk and Commercial Real Estate

The sharp rise in the provision, more than sixfold, reflects concerns about commercial real estate, particularly office properties and some apartment loans, whose values fell as higher rates raised financing costs and remote work reduced office demand. Net charge-offs rose to about 0.41 percent of average loans in 2024. The bank also reduced total loans by about $1.4 billion, shrinking riskier exposures. Rising rates thus hurt the bank twice: through funding costs and through borrowers' ability to refinance.

Credit risk and interest rate risk were linked here. The same higher rates that raised Valley's funding costs also raised its borrowers' refinancing costs, and property loans written when rates were low came due at rates their buildings' rents could not easily support. A bank that manages the two risks separately can miss that connection; one that stress-tests its loan book against the same rate path it uses for its margin sees it.

Profitability and Capital

Net income fell by a third over two years, and return on equity dropped to about 5.4 percent, below most estimates of the bank's cost of equity. Equity rose in 2024 because the bank raised new capital, strengthening its ability to absorb further credit losses at the cost of diluting existing shareholders. The efficiency ratio, non-interest expense divided by revenue, improved to about 60 percent from 62 percent, as the bank cut costs to offset the pressure on its margin.

Capital matters for more than regulation. A bank with a thicker cushion can absorb losses without shrinking lending, and markets watched regional banks' capital closely after the 2023 failures. By raising equity, Valley accepted lower returns per share in exchange for greater resilience, a trade-off the course's discussion of capital adequacy anticipates: more capital lowers the risk of failure but also lowers return on equity for a given level of profit.

Monetary Policy, Regulation and the Outlook

Three external factors will shape the bank's next few years. First, if the Fed lowers rates, deposit costs should fall faster than loan yields for a liability-sensitive bank, improving its margin, though competition for deposits may slow the relief. Second, commercial real estate losses will depend on how quickly property values stabilize and borrowers refinance; lower rates would help. Third, regulation after the 2023 failures of Silicon Valley Bank and others is moving toward stronger capital and liquidity requirements for banks of Valley's size, including more attention to unrealized securities losses and uninsured deposits (Board of Governors of the Federal Reserve System, 2023), which would raise its costs but also its resilience.

SVB's collapse that March made every one of these concerns sharper. Fed staff later concluded that rapid growth, uninsured deposits and unmanaged rate and liquidity risk sank the bank, and that examiners moved too slowly (Board of Governors of the Federal Reserve System, 2023). Regional banks with large uninsured deposits and concentrated loan books faced closer scrutiny from depositors and regulators afterward, and Valley's efforts to grow core deposits and raise capital can be read in that light.

Recommendation

For an investor or lender, Valley's statements describe a bank under pressure but adjusting: it has raised capital, built reserves, trimmed loans and cut costs. The key indicators to watch are the share of non-interest-bearing deposits, the trend in commercial real estate charge-offs and the gap between its return on equity and its cost of equity. If rates fall and credit losses peak, its earnings should recover; if office and apartment values keep falling, further provisions would delay that recovery. A cautious position, focused on these indicators, is warranted.

References

Board of Governors of the Federal Reserve System. (2023). Review of the Federal Reserve's supervision and regulation of Silicon Valley Bank.

Mishkin, F. S., & Eakins, S. G. (2018). Financial markets and institutions (9th ed.). Pearson.

Valley National Bancorp. (2025). Annual report on Form 10-K for the fiscal year ended December 31, 2024. U.S. Securities and Exchange Commission.