Q2 2021 Valley National Bancorp Earnings Call
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Good day and thank you for standing by welcome to the Valley National Bancorp Second quarter 2021 earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
To ask a question. During this session you will need to press star 1 on your telephone please.
Please be advised that today's conference is being recorded.
Have you quantified or assistance, please press star zero.
I would now like to hand, the conference over to your Speaker Travis Lan head of Investor Relations. Please go ahead.
Good morning, and welcome to Valley second quarter 2021 earnings conference call presenting on behalf of Valley today are president and CEO IRA Robbins, Chief Financial Officer, Mike Hagadorn, and Chief Banking Officer, Tom on your Danza before we begin I would like to make everyone aware that our quarterly earnings release and supporting documents can be found on our company website.
Sally Dot com when discussing our results we refer to non-GAAP measures, which exclude certain items from reported results. Please refer to today's earnings release for reconciliations of these non-GAAP measures. Additionally, I would like to highlight slide 2 of our earnings presentation and remind you that comments made during this call may contain forward looking statements relating to valley National Bancorp and the banking <unk>.
Industry Valley encourages all participants to refer to our SEC filings, including those found on form 8-K, 10-Q, and 10-K for a complete discussion of forward looking statements with that I'll turn the call over to IRA Robbins.
Thank you Travis.
And welcome to those of you listening into the call.
This morning, I want to discuss our recently announced acquisition of the West Chester Bank.
As well as our targeted efforts to capitalize on disruption opportunities in our markets.
Mike will then provide additional details on the financial results before opening the call to your questions.
In the second quarter of 2021, we reported net income of $121 million earnings per share of <unk> 29 cents and return on average assets of 1.17 per cent for.
For the fourth consecutive quarter. This represents the highest level of quarterly earnings in valleys entire history.
On an adjusted basis return on average assets was 1.3%, reflecting strong net interest margin performance improved fee income on it.
Stable provision for loan losses.
Looking forward, we expect that additional balance sheet growth and core margin stability will continue to drive strong financial performance and shareholder value over time.
A few weeks ago, we announced the acquisition of the West Chester Bank.
We are thrilled with the opportunity to partner with this high performing commercial bank and look forward to having president and CEO John polymer lead our combined efforts in the Westchester market.
This is a dynamic area with significant household wealth and commercial lending opportunities.
Westchester also contributes a strong core funding base and physical delivery presence in this attractive market.
From a financial perspective, we believe the transaction is very well structured.
We expect a 1% annual earnings accretion and no impact to our pro forma tangible book value per capital ratios.
West Chester will be nicely additive to the $425 million alone Valley already has in Westchester County.
Johns team will benefit from <unk> comprehensive product set and robust balance sheet resources.
As a result of this combination we expect that Westchester county, and the surrounding market will be a source of meaningful growth for valley in the future.
Yeah.
While we are excited about this transaction it will not disrupt our organic growth initiatives or prevent us from considering other strategic opportunities.
To that end I thought it would be helpful to reiterate our M&A priorities and relevant financial thresholds.
We remain interested in potential transactions that would accelerate our strategic initiatives around sustainable balance sheet growth.
Enhanced efficiency and improved revenue diversity.
From a financial perspective, we are focused on tangible book value preservation.
To the degree that an opportunity strategically compelling we will be willing to accept a modest tangible book value dilution as long as the earn back period is short.
We are seeing some recent transactions with earn back periods beyond 3 years, which is likely outside of our comfort zone.
At Valley, we have strong organic growth initiatives underway.
And while we have the currency to be competitive we will not sacrifice from the financial guard Roes that we have established.
We believe that this discipline is in the best interest of our shareholders and potential partners over the long term.
Historically valley is balance sheet growth has been well balance between acquisitive and organic efforts.
This balance is likely to continue over time and we are extremely excited about the organic growth opportunities currently available to us.
During the quarter, we originated a record $2.6 billion of new loans.
This was $1 billion higher than the first quarter and resulted in 10, 4% annualized growth in non <unk> loans.
The value of our diverse business lines and balance sheet remains a parent as this growth was spread across commercial residential and consumer categories.
We continued to see meaningful opportunities on both our northeast and southeast geographies.
Our recent hiring efforts and proven ability to attract and service new clients positions us well to continue to capitalize on disruption across our entire footprint.
We also have a really exciting and unique story playing out on the funding side of our balance sheet.
Over the last few years, we have focused on diversifying and enhancing our core funding base.
On a combined basis, our cannabis banking build out digital account opening upgrade and the ability to cross sell deposit accounts to new PPP customers have generated nearly $1 billion of new deposits from the last 6 to 9 months.
We recognize that all banks have benefit to a certain degree from surge deposits and excess liquidity in the banking system.
But these valley specific initiatives and others in the pipeline represents sustainable and scalable future funding sources that reflect our ability to identify and execute on customer acquisition opportunities.
Capitalizing on the loan and deposit opportunities ahead of US we will depend on continued investment in talent technology and new business capabilities.
Over the last few years. These investments have been largely funded by expense savings in other areas.
That low hanging fruit has largely been captured and future investments may result in some incremental expense growth over the next few quarters.
As with everything that we do we will be thoughtful on the investments, we make and work hard to find additional offsets in the legacy expense base.
We remain laser focused on generating positive operating leverage over time.
And any investment will be aimed at driving stronger revenue growth and long term financial performance.
We are extremely excited about this quarter's performance and the opportunities that remain available to us.
Our growth and performance during the quarter reflect the tremendous team and infrastructure that we continue to develop.
The future is extremely bright for valley and we look forward to continued success alongside our new partners at the West Chester Bank.
With that I'd like to now turn the call over to Mike Hagadorn for some additional financial highlights.
Thank you IRA turning to slide 5 you can see that Valley's reported net interest margin increased to 318% from 3.1% and 4% in the first quarter of 2021.
Exclusive of the impact of PPP loans, we estimate that net interest margin would have been 3.07%.
<unk>, 3.05% in the prior quarter.
This improvement reflects meaningful funding cost reductions, partially offset by the drag associated with carrying a higher cash balance.
Much of the quarter's loan growth occurred in June and will more meaningfully impact third quarter results.
We continue to actively manage the funding side of the balance sheet and drove another 90 basis point reduction in our interest bearing liability costs during the quarter.
Interest bearing deposit costs continued to decline due to a significant reduction in time deposit cost and balances.
We also benefited from continued growth in noninterest bearing deposits.
During the quarter, we issued $300 million of subordinated debt at a cost of 3%.
We also redeemed $60 million of legacy subordinated debt at a cost of $6, 2.5% and prepaid nearly $250 million of <unk> advances at an effective average cost of $1.8 2%.
In the aggregate these redemptions will almost entirely absorb the annual interest expense of the new subordinated debt.
Despite significant loan origination activity and our efforts to reduce borrowings on wholesale funding our cash balances continued to increase during the quarter, putting modest downward pressure on our margin.
We will remain vigilant and look for opportunities to put cash to work, but recognize that we are likely to continue to hold more liquidity than in the past.
You can see more detail regarding the impact of PPP income on slide 6 we.
We estimate the PPP contributed 11 basis points to the margin versus 9 basis points in the first quarter.
As of June we had forgiven $1.8 billion of PPP loans, representing over 75% of our round, 1 and 2 originations.
We expect that the pace of forgiveness will slow somewhat in the third quarter and beyond.
Slide 7 outlines our interest rate positioning and the remaining opportunity to reprice liabilities over the next 4 quarters.
Of note, we have $1.2 billion of borrowings at a cost of 138% set to mature in the third quarter.
We have capitalized on the majority of the funding improvement opportunities in our CD and broker deposit portfolios, we continue to grind, our non maturity deposit costs lower.
As a result of active balance sheet management and significant deposit growth. Our net interest margin has been extremely resilient over the last few years disc.
Despite the challenging interest rate backdrop, we expect to preserve a net interest margin in the range of at least 3% to 3.05% give or take for the remainder of the year, excluding the impact of PPP.
Slide 8 illustrates the ongoing improvement in our funding profile.
Total deposits increased another 2% during the quarter fueled by a 5% increase in noninterest bearing balances and a 7% increase in other transaction balances.
Continuing our recent experience CD balances declined 21% per quarter.
Noninterest and interest bearing transaction accounts now comprise 32% and 55% of total deposits effectively.
These dynamics contributed to the sequential 7 basis point reduction in deposit costs in the second quarter.
As I remember <unk>, our recent growth in low cost core deposits is partially attributable to our unique funding niches specifically in the cannabis and digital areas.
We have also had success cross selling deposit products to commercial customers, including those newly acquired through PPP.
As these efforts continue to accelerate we will monitor opportunities to further enhance the efficiency of our physical delivery channels.
Slide 9 details our loan balances and origination trends over the last few quarters.
The strong lending pipeline that we described last quarter resulted in $2.6 billion of loan originations during the second quarter.
This represents a $1 billion sequential increase in origination activity or a 60% increase from the first quarter.
As I remember this growth was well balanced between our consumer and commercial categories and across geographies.
Roughly 1 third of the growth was in residential and consumer with the remaining 2 thirds split relatively evenly between northeast and southeast commercial categories.
We continue to prove our ability to attract and service customers across our geographies.
We did not sacrifice underwriting from a credit perspective, as both commercial and residential originations remained in line with our history from an LTV and FICO perspective.
On a year to date basis, we have achieved 7% annualized non PPP loan growth.
We believe we are positioned to achieve the higher end of the mid single digit range that we guided to coming into the year.
Moving to slide 10, we generated noninterest income of $43 million for the quarter up nearly 38% sequentially.
The increase was broad based reflecting a rebound in residential mortgage gain on sale income and higher income from both swaps and insurance commissions.
Fee income increased to 12, 5% of total revenue during the quarter up from 9.6% in the first quarter.
We continue to explore diverse fee opportunities that would contribute to greater revenue diversity and noninterest income consistency.
On Slide 11, you can see that our adjusted expenses increased by approximately 2% to $160 million.
<unk> 2 thirds of the sequential increase was for higher cash incentive compensation accruals.
As we have consistently stated we are focused on driving sustainable positive operating leverage.
During the quarter or 6% adjusted revenue growth outpaced adjusted expense growth by more than 3 times.
This drove our adjusted efficiency ratio down to 46, 6% from 48, 6% in the first quarter.
While we are proud of the efficiency gains that we have achieved over the last few years, we are not satisfied.
As I remember <unk> ongoing disruption in our markets continues to create unique growth opportunities for our organization.
Our efforts to capitalize on these opportunities may lead us to selectively invest in additional revenue generating talent technology and business capabilities.
Start full efforts May result in somewhat higher expenses in the near term, but should support meaningfully higher revenue over time, which will result in further positive operating leverage.
Turning to slide 12, you can see our credit trends for the last 5 quarters, our allowance for credit losses declined to 1.4% of non PPP loans from 1.7% in the first quarter.
This was the result of significant loan growth that we achieved during the quarter.
From a seasonal model perspective, due to the improved economic outlook in our markets. We replace the 10% weight on Moody's prolonged slump scenario with a 10% weight on the upside scenario.
We will continue to review these weightings on a quarterly basis.
Our non accrual loan balances ticked up to 68 basis points from 62 basis points from the prior quarter.
This increase was largely driven by a single construction loans.
We have allocated a specific allowance of $3 million for this relationship.
Early stage accruing past due loans also ticked up during the quarter, but remained below 2020 levels.
During the quarter, our active COVID-19 related deferrals declined to $142 million or just for percent of total loans versus <unk>, 9% in the first quarter.
Additional detail on our deferrals can be found in the appendix.
As we have reiterated throughout the crisis Valley's historical credit strength remains a distinguishing characteristic of our organization.
As a result, we are confident in our existing reserve and expect to outperform the industry on credit loss experience in any economic environment.
Slide 13 illustrates the consistent growth in our tangible book value and the continued improvement in our capital ratios tangible.
Tangible book value has increased 9% in the last 12 months driven by our strong earnings performance.
Our tangible common equity to tangible asset ratio increased to 773% from 7.5% in the first quarter.
Adjusting for a $1.4 billion of PPP loans.
<unk> common equity would have been above 8% as of June 30.
Our total capital ratio also increased significantly during the quarter as a result of our very successful subordinated debt issuance.
We continue to believe that our earnings power will provide the capital necessary to support our organic growth initiatives.
With that I'll turn the call back over to IRA for some closing commentary.
Thanks, Mike.
We're extremely proud of the strong growth and financial performance achieved this quarter.
Our net interest margin has been extremely resilient, reflecting our active balance sheet management and loan and deposit <unk>.
We continued to identify unique opportunities for growth and remain focused on driving positive operating leverage.
<unk> future is extremely bright and we are committed to remaining a high performing institution for the benefit of all of our stakeholders.
With that I'd like to now turn the call back over to the operator to begin Q&A. Thank you.
Thank you, ladies and gentlemen to ask a question you will need to press the Spa agenda, 1 key on your Touchtone telephone.
To withdraw your question press the pound key.
<unk>.
Please standby, while we compile the Kenny roster.
And our first question coming from the lineup.
Bobby <unk> from Piper Sandler Your line is open.
Hey, guys good morning.
Hi, Brian.
I was wondering if you could talk a little bit about.
The recent lending hires particularly down in Florida.
Those teams still ramping up.
And did you add any 1 in the quarter.
Hey, Frank It's Tom on your Dan, Yes, we continue to add.
Where we think we're going to get revenue enhancement. We added 14 in total in Florida over the last I'll say 6 to 9 months 8 in New York New Jersey.
On boarded 3 during the second quarter. We have offers out for a few more we are starting to experience the benefits of their pipeline built and their pull forward into loans deposits and relationships for the bank, but as you know it usually takes 6 to 9 months to build a pipeline to start on boarding but we're starting to see the benefits of that already.
<unk>.
Okay, great. Thanks, and then.
I already mentioned.
Laser focused on positive operating leverage.
You also mentioned the higher expenses.
Due to investments in the near term just wondering if maybe you could.
It sounded to me like maybe the efficiency ratio could tick up then in the near term and.
And just wondering if you could maybe give your thoughts there or any governors around that over the next couple of quarters.
Thanks, Thanks, Frank I.
I think that when we look at our adjusted efficiency ratio. Obviously the card number is impacted because of the PPP as well, but we have as you mentioned down a lot over the last few years to try to rightsize. The organization based on inappropriate foundation to really grow we think as we said during our earlier comments really gotten to a point where.
Maybe there's a bit more focus within the organization on revenue enhancement and putting the appropriate infrastructure in place to really leverage that to a greater degree.
Mike can you give a bit more commentary yes.
Yes, Frank this is Mike.
Revenue lags as you all know sometimes the people investments and as Tom said, we've made some of those in.
In our prepared remarks, you heard some comments around some other hires as well that are not just on the revenue producing part of the business.
No.
What I would say at this point is our our past run rate. The last several quarters was around $157 million I think our adjusted expenses. This quarter of 160 are more indicative of what the go forward run rate will be.
Just to put it in some kind of context, Frank when you think about <unk>.
Both within the organization, it's not just on the revenue side from some of the new hires that Tom referenced earlier, but it's also on that on the technology side on how we think about the dollar amount of investment on the technology, what's the benefit from an automation perspective is going to look like down the road on.
On average we spent about 52% of our technology dollars on running the bank compared to about 68%. According to Gartner, where most banks are so there's a lot of investment we have internally going into improve and transform valley from a customer experience perspective, as well as we think from a benefit overall on the efficiency side. So the dollars that.
We're spending on both on the revenue side and on the operating side on debt expense side to really prove out a future operating.
<unk>.
Okay, I just want to make sure I understand though not now I'm not so sure on terms of the efficiency ratio is at the messaging is that it might.
Hover around here on the near term near term or or could it tick up in the near term.
Any color on that.
When you back out Pvp, it's going to tick up right. So, let's just do the math right. There youre going to have an uptake just just overall based on that debt.
There will be some additional investments that are going to come that we think will provide some some positive operating leverage as we continue to move forward and the revenues are going on all of that and that being said as Tom referenced higher in 2014.14 people on the revenue side about 6 to 9 months ago, we should begin to see some benefit from them starting in the next quarter as well.
And that will mitigate some of the some of the additional expenses that were describing.
Gotcha, Okay. Thank you.
Our next question coming from the line of Steven Alexopoulos with Jpmorgan. Your line is open hey.
Good morning, everyone.
I see.
Just to start on the loan side I know you guys said last quarter. The loan pipeline was strong heading heading into this quarter, but the $2.6 billion was a really great result could.
Can you talk about the competitive landscape that you saw.
We're booking those originations and do you think you can sustain that level of originations here.
Hey, Steven its Tom.
Our pipeline on the commercial side remains strong we're about $2.6 billion with half of that being loans that we've approved that.
In stages of documentation to close that level that 1.3 level is in line with what we reported at March 31, so that piece of the pipeline. Despite active closings, especially in June of this year is building and that segment of closing is at the same levels as we had in the last quarter, we are seeing a slowdown on the.
<unk> side, especially in auto and on some of the refinance activity on the resi side, the expectations that 7 slightly over 7% annualized for the first 6 months, we think that number will hold up for the second half of the year.
But what about the competitive environment, Tom could you comment on that particularly I am curious northeast for southeast sure sure.
As you know there is some disruption from.
Other acquisitions or merger activity in both markets, we're benefiting from that through the attraction of people as well as customers.
<unk> actively on boarding those customers, we assisted with PPP.
We are building loan pipeline and loan portfolio on deposits from that we have while we instituted years back was a very focused customer solicitation program identifying what are for customer is a valleys identifying programs on processes to onboard them cross selling them in debt.
Rewarding our people based on that performance.
That's not new that we've been doing that that has reap benefits for us and create a consistency. The northeast has been very steady growth for us. So we're getting faster growth in the southeast.
Cut the competitive landscape is active it's there it's not just banks, but we are we are getting our fair share.
Okay.
Helpful and IRA following up I think you've called out $1 billion of deposits tied from various initiatives, which included the cannabis business could you give us an update on cannabis on maybe what portion of those deposits are in that business now.
So at this point, it's about a third of those deposits are coming from the cannabis sector. I think we've been very focused on that making sure that we have the right risk appetite day..1 we spent about 18 months devising our internal approach as to how we want to go about it to make sure. It was consistent with the risk appetite for valley.
We have targeted.
For large multi state operators as we think they provide.
Appropriate risk.
For us as we look at who we wanted to partner with here.
And yes.
Or opportunity there we are banking tier 1 customers in may.
Curious, the Pennsylvania, Ohio, Florida, and Illinois at this point Okay.
Okay.
That's helpful. And then finally I was just following up on your prepared comments when you ran through M&A priorities, which I don't recall you doing before.
Are you signaling that you are maybe more actively pursuing additional M&A here.
And we've seen quite a few larger deals from your peers. How are you thinking about a larger deal here.
<unk>.
Yes.
Probably maybe a bit more formal today as to some of the financial guardrails, but.
Definitely.
Internally and in other conversations.
Is sort of.
The carve out that were pretty comfortable with.
I think probably today, we're maybe a bit more focused on targets that could accelerate some of the revenue growth our revenue diversification versus straight up expense.
Opportunities.
That may have shifted a little bit from where we were.
A couple of quarters or even a few years ago.
We do think there is significant amount of disruption in the marketplace today and as a result of that there is real opportunity for us to look at leveraging revenue growth within our footprint.
As well as individual assets asset classes and.
We're really excited about.
About that that said.
Some of the deals that I've seen where you have 3 years of tangible book value earn back.
Just some excess etame.
Okay, and what about you guys pursuing a larger deal here.
Is larger than the bank of Westchester properly.
Well, even MLP right I mean, some of the deals that you've seen have been.
And what we like.
And I think the MLP has to really make sense I'm really excited as is our team about the organic initiatives. We have here I think a lot of them are really beginning to come to fruition and if we were to do an MLP or something of significant size that has to make real strategic sense for us from the revenue expansion perspective, and if it doesn't we're very comfortable with just going down the path that we are.
Going where think where we're generating at this point well above peer returns and we think we have a path to continue that and really accelerated so by no means that we feel any kind of pressure by any means that we need to start looking at an MLP because there is technology gaps that we have because theres a market gaps that we have because there's talent gaps that we have.
On the contrary I think our organic opportunities are probably much better than what our peers are and there is absolutely zero pressure on our end to do anything of an MLP based.
Based on being back into them.
A corner by site.
That's really helpful color. Thanks for taking my questions.
Steve.
And our next question coming from the line of Michael Perito with <unk>. Your line is open.
Okay.
Hey, guys. Thanks for taking my questions Hey.
Michael.
I wanted to just start clarifying Mike I want to make sure I heard you right on on the NIM. So you are saying that the core or adjusted NIM will be between 3335 for the balance of the year here and then PPP will be either on top of that or or a detriment to that depending on the pace of forgiveness.
Okay. So it will be on top of that so that's the core splits issues. The second quarter numbers $3.18 was the reported result.
Ex PPP, it's 307.
And as a reminder, the $2 billion, we had in excess cash roughly weighed on NIM. Another 2 basis points. So as we think about NIM compression going forward PPP forgiveness, both volume and.
In absolute impact trailing off as we get more and more of the.
Those balances off the balance sheet.
We think that the core NIM stability that we're shooting for is between 3 and 3.05% I would say that the most recent quarter coming up bias would be towards the higher end of that.
Right I was going on.
If the growth is where you guys are suggesting that should be that debt that would make sense.
On.
And then on the.
The fee side.
I believe you guys had.
Yeah.
Close to if not your highest quarter you've had on kind of the trust and investment side and then the.
The biggest quarter, you've had on the insurance commission side and year on a half maybe just curious if you guys can comment on on some of the trends there and maybe what we should be expecting near term on on fee growth.
Yeah, Hey, Michael It's Tom I'd answer on the.
The insurance side, a lot of that is coming through our title company and an improvement on our general insurance agency that we operate the title business will will continue to grow maybe not at the same pace relative to the growth in.
The refinance on the residential market for us.
As well as they do a lot of commercial business. So we expect that to be steady may not grow at the same pace. It's grown in the last quarter and I think overall our fees on the wells.
Trust and insurance business should be flat to slightly up.
Helpful.
And then just last question for me.
We saw a couple of articles that have that Hadley you guys to the condo that debt collapsed on South Florida. Just curious if you guys could comment on whether there was any lending or depository relationship there and maybe just give us a refresher on kind of how you underwrite those types of relationships.
In that marketplace that that'd be great.
Yes sure. There are we had no loans outstanding on that property.
Okay.
The general portfolio that we have on the HOA is.
Relative to our size is small it's about $250 million of Outstandings.
The waterfront high rise is $7 million of outstandings in less than $25 million in commitments.
Our portfolio is primarily inland around golf community single family and townhouse.
From a depository the portfolio generates $800 million on deposits and as I said before $250 million or less slightly less than in loans. Our average loan on our portfolio was 425000.
Really helpful. Tom Thanks, and obviously not a huge number but just.
In terms of the underwriting process of those types of buildings is there some type of like property condition assessment. That's part of your your process. There I apologize probably a pretty simplistic question, but any additional color would be helpful.
Absolutely.
Other references following hurricane Andrew back in the nineties.
The requirements for a building.
And.
Safety and the buildings was was enhanced and the bulk of our loans if not most of our loans were done were buildings that were done after those product improvements on process improvements.
From an underwriting standpoint, we have an in house engineer that reviews on.
All of the advances on any of the elevated construction or improvement.
Parts of the loans that we may have and we have third parties will also review.
Very helpful. So I guess at this point, it's safe to say that you guys feel.
Well for small and relative size still feel pretty decent about that portfolio and the properties that are within it.
Yes, and again keep in mind, it's primarily townhouse and single family homes inland.
And it's a deposit business primarily for us we lead with deposits in that business.
Great. Thank you for spending a minute on that I appreciate it and thanks for answering my other questions.
Yeah.
Our next question coming from the line of Steven <unk> with RBC capital. Your line is open.
Hi, good morning, guys.
Good morning.
Just your West Chester Bank acquisition, I assume you've been in discussions.
Markets can you share with us.
On your Florida market sales versus your Metro New York market, how are they different.
In terms of maybe activity.
And opportunities.
Yes, Stephen this is Travis Lan just got to step in and try and respond and then Eric.
Clean up what I, what I missed but.
The issue with US look we'd love to do an acquisition in Florida, I think but that market, there's not as many targets and the targets that exist are.
Highly valued I would say and make the economics, a little bit more challenging and I think that's why you saw US go out on the more of a hiring push earlier this year because we identified the fact that it was unlikely that we would do an acquisition in Florida in the near term so organic growth opportunities were more significant and Thats, where we focus our efforts.
Theres more opportunities up in the northeast, but we look kind of as you can tell with westchester across the size spectrum.
IRA said, we're focused on strategic opportunities to grow revenues in West Chester is a very high performing bank. Despite its size.
And you can look at the earnings accretion say, 1% is immaterial, but what that doesn't capture the opportunity for us to provide them products. They don't have today and to accelerate their growth with our capital on balance sheet resources.
That's part of why it was so compelling.
On an IRA.
Nothing else to say to that channel.
Thank you.
Great. Thanks Travis.
Then just moving on to the loan growth I mean really great quarter, all around a lot of the growth came from CRE portfolio can you just give us some color on.
Was that primarily in Florida, and any specific types of CRE.
CRE.
Sure.
Well.
Well balance across the regions.
<unk> represented about 40% of our production from 55% of our growth.
More importantly was distributed evenly and product types between apartment industrial some retail to essential type of properties average loan size was in line with our previous CEO perf.
Performance for $5 million is the average loan size weighted average loan to value was 53% and debt service average was over 1.5 times very equally balanced between New York, New Jersey, Florida and Alabama.
That's great to hear Tom I guess, you mentioned that the 7% year to date in the beginning it looks like you feel comfortable that Youll you may be in that range for the second half of the year do you expect a similar performance with CRE as well.
I would expect CRE will be still the larger generated on the C&I business were a little hamstrung in that for our line utilization how companies are not borrowing better than they are paying down our average utilization went from 41% to 38% quarter to quarter.
We're still producing C&I business slight uptick.
It's a little bit harder for road.
Understood I appreciate the color and congrats on the good quarter.
Thank you on the only other thing to add as debt. We also continue to exit non relationship low yielding business and we had about $175 million of that repaid in the second quarter and $300 million year to date, primarily assets obtained through the low or a tiny purchased at New York City.
Multifamily type.
So we'll continue to do that and still experienced a growth debt we're suggesting.
Understood. Thank you.
Okay.
Our next question coming from the line of Matthew Breese with Stephens, Inc. Your line is open.
Good morning.
Hi, Matt for them.
I'd like to drill down into expenses a bit more so Mike you mentioned that the $160 million on operating expenses is more indicative of where we're going but I get the sense from iris commentary that the $160 million for really a starting point, where we could see some growth. So my question is what do you expect to add on top of the $160 million.
What is your anticipated growth from here or might do I got my read wrong.
Sure.
I don't think you have the read wrong as you look now I'm talking about a multi year look at it I'm not talking about next quarter. So on a multiyear lookout.
Especially some of the technology investments not so much the software and the related depreciation, but the people that we're bringing on board to accomplish the technology build out over time are going to drive.
<unk> higher overtime message inevitable, but I want to point, you back to what IRA and I, both said to the prior question around it those investments are being made.
While you may not get that 1 to 1 relationship when you actually see the financial benefit of it those investments are being made so that we can be a more efficient.
Entity in the future, we can service customers differently and faster we can release some of the redundancies in our processes and streamline our workflows.
Those benefits show up after those technology projects are put in place in <unk>.
To be clear about this from talking about a multiyear kind of view forward.
Matt maybe I'll just add to that this is not a first niagara by any means as to how you think about when we think about expenses here.
3 or 4 years ago. When we first started talking about some of the initiatives. We are going to do from a strategic perspective, we talked about on an incremental $48 million of technology spend as.
As you can see and we were able to total to.
It really layer in that $48 million can we still dropped the efficiency ratio across the entire organization. Every single dollar we spend here has to be justified has to make sure that there is an appropriate rich on it we're not doing it we're not just spending money on technology for what we think is going to be revenue enhancements, but what we think will be franchise building opportunities and theyre going to be in line.
And appropriate with the appropriate revenue growth and earnings per share growth that we have it's not going to outpace it.
This is Travis Matt just from a modeling perspective right. So we were $1.60 of adjusted expenses this quarter, but that included $2 million of what I would call higher abnormally high kind of cash incentive accruals.
So when you take that out you kind of add some a little bit of index.
On the expense growth that we're talking about it gets you to that 160 and thats kind of whats what we're contemplating at this point, which is why I think Mike said that 160 run rate was good luck.
Okay.
Next question for you is just could you talk a little bit about the loan portfolio has exposure to floating rates. How much is there and then how much is subject or below floors, where if we do get a fed hike, we're not going to see the benefit.
Okay.
Yes. This is Mike I'll take a stab at it and I'm sure Tom will join on the end.
Within the entire loan book, roughly 60% of our loans $18 billion are adjustable and of that $18.12 billion or so are tied to LIBOR or prime and they re price on a regular basis. So.
Your point is I think what youre getting at is do we have the ability to have re pricing take place in that 60% I think we do other biases towards that but it is a balanced portfolio.
Okay.
I did want to talk a little bit about valley direct.
The digital bank can you give us a sense for the use case here the capabilities and the reason I ask is obviously the world is increasingly using mobile devices and all things digital but during.
During the up interest rates cycle might got was that the digital bank offerings from regional bank peers tended to be strictly deposit gathering and came with higher deposit betas.
Perhaps you could give us just a quick pitch on valley direct aim and how it will be different and ultimately value enhancing.
Yes, I think we just reported on this in the first quarter.
At Valley direct is really opportunity to revamp our online account opening process, we don't need it today for deposit gathering and were not really using it for that that benefit we're using it primarily to improve the process create efficiencies rollout. This account opening process online in each of our branches developing those efficiencies.
There we have seen traffic slow in the branches, we have CNR online on mobile utilization increased 15% to 25% respectively from last year, and we will continue to use that valley direct as an efficiency for on boarding new accounts into our system.
Okay.
Really just following up on that point it is not as Youre, describing something we're just looking at from a deposit perspective. It has an opportunity from a platform perspective to how we think about opening crowds assuming accounts across a multi spectrum of different structures.
Structures, whether it be on the deposit side and on the loan side we.
The ability to really build allowed us in house, which was important to us that gives us the flexibility to make sure that the customer experience for some of that we own now with a third party loans and I think that's part of the.
Our focus as we move forward, we need to own our customer experience as we need to own our employee experiences and a lot of that is driving what the technology initiatives are across the organization.
If you were to go on to Valley direct today, you would find an experience I think many would really enjoy.
3 minutes, plus or minus to open up an account.
And on boarded as well here, which is something that we think is leading and will help drive the multitude of efficiencies across the entire organization.
Okay.
Just 1 from me is.
On the allowance you mentioned in the release debt there was increases in the allowance across most of your loan categories, including commercial real estate up 5 basis points due to.
Higher quantitative reserves could you just flesh it out a little bit more what happened there and are you preparing for any sort of increase or change in the.
On the level of charge offs.
So within the model on the most sensitive attribute would be the the loss rates and those did not materially change.
So the biggest change from a dollar perspective was the fact that we had significant loan growth.
When you combine that with an improving economic scenario that I talked about on my prepared remarks from Moody's.
You get a slightly lower required.
Required allowance and Thats why you see the minor 3 basis point tick down in our allowance coverage ratio.
Great. That's all I had thanks for taking my questions.
Thank you thanks, Matt.
And I'm showing no further questions I would now like to turn the call back over to Robin for any closing remarks.
Thank you very much and we look forward to speaking to you next quarter.
Okay.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.
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For the year.
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Okay.
Okay.
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