Q4 2021 Valley National Bancorp Earnings Call

January 27, 2022

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Today's conference is scheduled to begin shortly please continue to standby and thank you for your patience.

[music].

Good day and thank you for standing by welcome to the fourth quarter of 2021, Sorry National Bank Corp 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 Didnt need to press star one on your <unk>.

Telephone I would now like to hand, the conference over to your speaker today, Travis Lan head of Investor Relations. Please go ahead.

Good morning, and welcome to valleys fourth quarter 2021 earnings conference call presenting on behalf of Valley today are CEO IRA Robbins President.

Tom I, Danza, and Chief Financial Officer, Mike Hagadorn.

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 at <unk> 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 two of our earnings presentation.

Remind you that comments made during this call may contain forward looking statements relating to valley National Bancorp and the banking 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 will turn the call over to IRA Robbins.

Thank you Travis.

And welcome to those of you on the call.

As usual I will provide some big picture thoughts before I turn the call over to Mike to discuss this quarter's results in more detail.

In the fourth quarter of 2021 Valley reported net income of $115 million earnings per share was 27.

And return on average assets of 1.08%.

Exclusive of merger charges, our EPS and ROE would have been 28.

And 114% respectively.

These adjusted metrics include approximately <unk> <unk> per share of after tax provision associated with the non PCI loans acquired in the West Chester Bank.

We generated net income of $474 million and adjusted net income of $488 million in 2021.

Adjusted net income was up nearly $86 million or 22% from 2020.

These exceptional financial results reflect the execution of our strategic initiatives surrounding organic growth Craig.

Credit preservation and positive operating leverage.

We generated organic loan growth exclusive of PPP and acquisitions of over 9% during the year.

Growth was strong across our markets, reflecting contributions from both legacy Valley associates and new hires.

Loan production was funded by low cost core deposits, which continued to increase across geographies and business segments.

Last quarter I spoke about our ongoing evolution to a leading regional bank.

Well I won't rehash those comments I want to reiterate that todays banking landscape offers tremendous opportunity for service oriented bank like valley.

The recent acquisition of the West Chester Bank and the pending acquisition of bank Leumi will enhance our competitive position and ability to capitalize on this opportunity.

These partners will bring us new business capabilities and access to geographies that will enhance our competitive position and support our growth targets.

By the end of 2022 valuable will be well over $50 billion in assets with a high quality core funded balance sheet and strong capital position.

And todays banking landscape. This is a very unique value proposition.

With that said the exceptional progress that we've made as a standalone entity should not be overlooked.

Our adjusted 2021 ROA of one 8% is nearly 40 basis points above our 2017 level.

This improvement was not dependent upon reserve releases.

Whether it is the result of net interest margin stability and consistent profitable organic growth.

As I think back on 2021, I'm proud of our ability to navigate COVID-19 uncertainty early on.

During the year, we recognized a mere $15 million of net charge offs.

Sequentially, just five basis points of average loans.

This incredible result is a testament to our lending and credit culture.

I'm equally proud of our ability to quickly pivot to an offensive position, which enabled us to generate significant organic loan growth and identify ideal merger partners during the year.

Looking ahead, I expect 2022 to be about execution.

Execution on the integration of our acquisitions.

But perhaps as importantly on the organic growth opportunities that exist for us.

As a relationship focused commercial bank, we strive to be consistently in tune with our clients' financial needs.

This has been a key driver of recent originations and will continue to support our organic growth going forward.

With significant M&A and technology disruption around us there is an increasing pool of potential new clients, which will provide an additional growth lever for valley.

We are excited by the team we have in place and are confident they have the right support and technology to capitalize on these opportunities.

With that I'll turn the call over to Mike to discuss some of the quarters financial highlights.

Thank you IRA turning to slide six you can see valleys recent net interest income and margin trends with and without the impacts of Triple P. <unk>.

During the quarter net interest income increased $14 million or approximately 5%.

This was primarily the result of strong organic loan originations throughout the year three.

<unk> 3 million of net interest income from Westchester and continued interest expense reductions.

On a reported basis net interest margin increased eight basis points to three 2% to 3%.

Exclusive of Triple P. The margin increased three basis points to 310%.

Our margin has performed very well throughout the year, despite the overhang of excess cash we.

We are actively driven down funding costs and are benefiting from strong organic loan growth throughout the year.

Slide seven illustrates the ongoing improvement in our funding base over the last few years, we have introduced new deposit niches and accelerated commercial deposit growth.

This has reduced our reliance on higher cost Cds and borrowings.

This quarter Cds and borrowings comprised 16% of total funding versus 29% a year ago.

Meanwhile, noninterest bearing deposits, including those assumed from Westchester increased 8% from the third quarter and are up 27% from a year ago.

During the quarter, our CD and non maturity deposit costs declined seven basis points and three basis points respectively.

Our focus on low cost core deposit generation has led to a significant reduction in funding costs and positions us well for potential rising rates as the year progresses.

Slide eight details our loan balances and the key drivers of our strong 2021 growth.

Exclusive of over $900 million of commercial loans acquired from Westchester and adjusting for Triple P runoff organic growth was over 9% for the year.

On an annualized basis organic growth was over 13% during the fourth quarter with contributions across our geographies and asset classes.

On the bottom right you can see the diversity of our growth by segment.

While CRE remains a key driver of our business C&I growth was strong in consumer channels contributed as well.

C&I growth was the result of new relationships and a modest uptick in utilization rates.

At December 31, commercial line utilization was 40% up from 39% at September 30, but still below the 41% level at the end of 2020.

As you know we have somewhat deemphasize the more transactional multifamily space, which did not contribute to our growth during the year.

The combination of new hires throughout 2021, and the acquisition of Westchester positions us for another year of strong organic growth in 2022.

Our well diversified loan pipeline stands above $3 billion.

Which is in line with September levels.

We anticipate 2022 loan growth to be in the high single digits.

As you May expect commercial asset classes will contribute more than residential and consumer but growth should remain well diversified across our markets.

Moving to slide nine we generated noninterest income of $38 million for the quarter.

The $4 million sequential decline reflected lower swap activity.

Revenue from loan sale gains was stable as were are traditionally less volatile other noninterest lines.

Trust and investment services income was strong in the quarter, partially driven by the addition of deadly ventures in October .

Deposit service charges also normalized throughout the year.

While we anticipate swaps income to rebound from the fourth quarter level the rate environment could weigh on mortgage banking revenues in 2022.

On Slide 10, you can see that our adjusted expenses were over $174 million for the quarter.

This number includes approximately $2 million for the operations of Westchester and deadly respectively.

We remain focused on generating positive operating leverage going forward over the last four years, our revenue growth has outpaced expense growth by more than two to one.

While we continue to explore incremental expense offsets to absorb ongoing investments future positive operating leverage is likely to be more dependent on revenue growth.

The acquisition of both Westchester and <unk> will enhance our capabilities and reach and contribute to strong revenue growth in 2022 and beyond.

Turning to slide 11, you can see our credit trends for the last five quarters.

Our allowance for credit losses declined to $1, one 1% of non Triple P loans at December 31 from one 2% at September 30.

Despite realizing net recoveries during the quarter, we recognized a $6 million provision primarily to account for a strong loan growth.

We also recorded a $6 million provision related to the non PCI loans and unfunded commitments acquired from Westchester.

It shouldn't be overlooked that our strong 2021 results were achieved without the benefit of a reserve release.

After a slight uptick in the third quarter, our nonaccrual loan balances improved 70 basis points at December 31.

The improvement was primarily in the <unk> segment.

Despite entering the year with uncertainty around the potential impacts of COVID-19, we.

We are pleased with our credit performance and expect to preserve our strong track record in 2022.

On Slide 12, you can see that tangible book value increased over 2% for the quarter and over 9% for the year.

We are extremely proud of this result in the context of our healthy dividend payout and the closing of the Westchester and deadly acquisitions.

Our commitment to producing consistent tangible book value growth guides, our strategic decision making process.

We remain very comfortable with all of our capital ratios and believe that our strong earnings performance will continue to support organic growth efforts.

With our strong capital position loan pipeline and enhanced core funding base, we are optimistic heading into 2022.

On page 13, you will see that we are re instituting select guidance for the year Spa.

Specifically, we anticipate high single digit organic loan growth of between seven and 9%.

This should help to absorb a reduction in PPP income and drive mid single digit noninterest income growth for the year.

We expect to preserve an efficiency ratio below 50% in 2022.

With that I'll turn the call back to IRA for some closing remarks.

Thanks, Mike.

I am extremely proud of our 2021 financial results.

As an extremely busy year for our organization and I am grateful for our team's hard work and commitment.

We are really excited about the opportunities ahead of us in 2022 and believe it will be another great year for valley.

With that I'd like to now turn the call back to the operator to begin Q&A. Thank you.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

Our first question comes from Michael Perito with <unk>. Your line is open.

Hey, guys. Thanks for taking my questions.

Michael Good morning, Mike.

Mike Sorry, if I missed this immediately do too much at once over here, but the the rate assumptions behind the NII guidance do you mind just.

Expanding on that a little bit for us.

Sure I appreciate that.

Questions I know this is Ben.

Topic on many calls with many of our competitors as well.

Our guidance and the model is reflective as of 12 31, and it incorporates 25 basis points of fed hikes occurring in May September and December .

And as a reminder, we previously have disclosed this in our Qs and Ks.

100 basis point shock increase will drive NII growth up four 5% on a static balance sheet and clearly we won't have a static balance sheet in 'twenty two with the loan growth that we're guiding to but that'll help you get.

A better feel for what we've actually baked in to our assumptions in 'twenty two.

Got it so you have the three hikes in there I guess the question is is that you've kind of pointed this out on the balance sheet makeup I mean, when you kind of look to budgeting I mean, what type of cash carryover do you guys assume or if you can't get that specific just I mean are you guys, assuming some normalization of all of the cash can be deployed.

Or do you guys assume that it carries through conservatively core.

The at least the first portion of the year here.

Yes, we do have some modest reduction in the cash or cash in the early part of 'twenty. Two I think the thing that you should keep in mind is that more than likely the first place we would go.

If we're in a much more robust economy, and we saw some deposit attrition. So the good news is we have that buffer to kind of first.

Take the blow if in fact, we have that which honestly given the the deposit sources that we built up over the year.

Including the amount of growth that we have seen in both business and checking accounts across the company. The last two years, mostly related to the way we use PPP to add new customers.

I would expect that you would not see as much of a reduction at least in the early rate increases as you might otherwise think.

Okay.

That's helpful. Mike. Thank you and then just a couple more on the expense side. So ex Westchester you guys were $172 million.

Give or take which was that.

A little bit above the range you guys provided last quarter I mean, it seems like there is generally some industry wide expense pressures upward curious if you could maybe.

Do you have a few moving pieces I know the efficiency guidance excluding.

The pending acquisition, but just curious if you could provide a little bit more near term commentary about how some of those expense pressures could come through is it fair for us to assume that the $172 million probably have some upward pressure here.

As we move forward.

Yes, as you said, Mike everybody in the industry I think is observing some upward pressure on overall expenses.

Not the least of which is related to wages and so we're not immune from that as well, but as we said in our prepared remarks, and I'll say it again.

We're cognizant of those pressures there the reality of the marketplace, but we still feel comfortable that we'll be able to manage our efficiency.

At or below 50%.

And probably more importantly, it's worth noting that we are willing to accept some disciplined expense growth, especially if it leads to us being able to strategically capitalize on some of the investments that we're making and they don't always lineup right. The expenses often times can lead.

The revenue growth. So we will remain focused on that but I think the guiding principle that you should hear from US today is we're comfortable with our overall efficiency ratio.

And generating positive operating leverage.

Got it and then just lastly, maybe a question for IRA just obviously 2021.

A couple of bank deals you guys launch valley pay growth in the cannabis sector grew down south.

<unk> ventures, there is quite a bit that you guys kind of brought into the fold and just as we think at the onset of 2022 here.

You kind of touched on this a little bit in your prepared remarks, but would just love what you think kind of the two or three maybe most significant growth opportunities are.

Tactical standpoint that you think we should be mindful of as we begin the year.

Thank you I think we've really established a wonderful foundation for us for 2022 Theres been significant efforts over the last few years to really generate a strong foundation for organic growth and not just organic growth in the geographies that we've historically been in but organic growth capitalize on what we're seeing down in the south as well as some of the national platform.

That we've been able to bill it and I really believe that's going to take off in 2022. Additionally, I think the ability for us to execute and layer in the two acquisitions from traditional bank perspective are going to be additive.

Probably more quickly than what we would have anticipated, but on the periphery. When you look at something like Dudley ventures, as well really the ability we have to incorporate that and provide a little bit of alternative fee income for us I think is going to prevail.

Benefits as well for 2022, so as I said on my prepared remarks, I couldn't be more excited about what we built here moving moving forward and just really realizing what that looks like in 2020, so it should be exciting for all of us.

Great. Thank you guys for taking my questions I appreciate it.

Thanks, Michael.

Thank you and as a reminder, if you would like to ask a question press. The Star then the one key on your text phone telephone.

Our next question comes from Steven Alexopoulos with JP Morgan Your line is open.

Hey, good morning, everyone.

Good morning, David Good morning.

I wanted to first follow up on the expense commentary.

Because if we look at the guidance, 50% or lower implies it could go up or down from here. So I'm not sure exactly what youre, saying would be helpful. Can you give us a sense like expense growth with the inflationary pressure. You cited is this a 5% year or is it a 3% year can you give us some magnitude more from the expense growth side.

Well I won't put a number on it I will say this if you look at the fourth quarter numbers, we generated 3% revenue growth against operating expense of approximately 4% and so as I answered answered Michael's question earlier around positive operating leverage.

On a full year 2022 basis, we are still committed to positive operating leverage and an efficiency ratio that's below those numbers, albeit acknowledging that we do have noise in the numbers right two acquisitions closing in the fourth quarter combined with the impact of looming, which is much larger than those two previously.

Closed or announced acquisitions okay.

Okay.

Stevens Travis two I mean, I would just say on that guidance side. I mean, we do give you kind of a range for NII growth right. So that'll help kind of drive your revenue growth assumption and then.

You can utilize the efficiency guidance that we gave you.

And if we can get a range for expenses.

Well actually following up on the net interest income outlook, the 5% to 7% is below the loan outlook 7%.

And you have some rate benefit built in because you just said that so are you assuming deposits run off is that why the NII outlook is below the loan outlook.

No actually Steven this is Travis again, just to be specific right. We had $85 million of PDP income in 2021, we have about $12 million left of an earn fees in that category. So theres going to be significant decline in PPP income and then we fill that bucket with a full year of Westchester and the benefits of rising rates the benefits of our balance sheet growth continued benefits of our interest expense saves.

So we do not have deposit runoff baked into the model no deposit do you think travelers who can grow deposits next year, yes.

Yes 2022.

Okay.

That's helpful and then finally.

IRA for you. So you said 2022 as the year your focus on execution.

Obviously been active on the M&A front does this mean.

You don't plan to look at or pursue M&A transactions for 2022.

I will tell you I think we have an incredible ability across our entire organization to really do both as you saw on I think slide slide formula as we talked about the benefits what we did from 2016 on the organic basis versus on the acquired so we've established a wonderful foundation here I think there is tremendous opportunity as I mentioned before about what bank land.

Offers.

The West Chester Bank offers us in <unk>.

We missed it we didnt focus on executing that and really leveraging that from a growth perspective than what we had before.

I do think theres going to be tremendous opportunity when we think about what's happening with M&A and not just from a technology perspective, but also from a consolidation I don't want to distract anyone here internally, but there may be something on the periphery that makes sense for us that really leverages, what we thinking about from a strategic plan perspective.

So much tremendous upside on just executing with the acquisitions. We've done that that's that's going to be the primary focus for us.

Okay actually I lied, if I could squeeze one more in the cannabis business how much growth did you guys have in the fourth quarter, where do those deposit balances and the year. Thanks.

With well over one hundreds of millions of dollars as to where the candidates businesses. Today I think the biggest opportunity there really is expanding some of the multistate operators I think we're in 17 states right now with an ability to go up to 27, I think what we already have approved.

We have over 40% of the current portfolio just in that pipeline as well. So it's an area of continued opportunity and growth for us.

We did begin to get a hip or telling to the lending business a bit at the end of the year and I think that the opportunities for growth in that space as well.

And even with the valley path as you mentioned.

Our closed loop payment platform that really enables us to.

We look at growth from a multitude of different perspectives, whether it be internally or even white labeling theres a lot of opportunity for us.

Agility that we're trying to create throughout the entire organization for many of the initiatives that we're putting forth and once again something to be very excited about.

Okay terrific.

Terrific. Thanks for taking my questions.

Thanks, David.

Thank you and I'm showing no further questions in the queue I would like to turn the call back to Howard Robin for closing remarks.

I just want to thank those of you that participated in our call today and we're looking forward to 2022 and connecting with you again. Thank you.

This concludes today's conference call. Thank you for participating you may now disconnect.

Yes.

Okay.

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Yes.

[music].

Good day and thank you for standing by welcome to the fourth quarter of 2021, Sorry National Bank Corp Earnings Conference call.

At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session Didnt need to press star one on your telephone I would now like to hand, the conference over to your speaker today, Travis Lan head of Investor Relations. Please go ahead.

Good morning, and welcome to valleys fourth quarter 2021 earnings conference call presenting on behalf of Valley today are CEO IRA Robbins President Tom.

Danza and Chief Financial Officer, Mike Hagadorn, 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 at <unk> 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 two 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 industry Valley.

We encourage 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 will turn the call over to IRA Robbins.

Thank you Travis and.

And welcome to those of you on the call.

As usual I will provide some big picture thoughts before I turn the call over to Mike to discuss this quarters results in more detail.

In the fourth quarter of 2021 Valley reported net income of $115 million earnings per share was 27.

And our return on average assets of 1.08%.

Exclusive of merger charges, our EPS and ROA would have been 28 cents.

And 114% respectively.

These adjusted metrics include approximately <unk> <unk> per share of after tax provision associated with the non PCI loans acquired in the West Chester Bank.

We generated net income of $474 million and adjusted net income of $488 million in 2021.

Adjusted net income was up nearly $86 million or 22% from 2020.

These exceptional financial results reflect the execution of our strategic initiatives surrounding organic growth.

Credit preservation and positive operating leverage.

We generated organic loan growth exclusive of PPP and acquisitions of over 9% during the year.

Growth was strong across our markets, reflecting contributions from both legacy Valley associates and new hires.

Loan production was funded by low cost core deposits, which continued to increase across geographies and business segments.

Last quarter I spoke about our ongoing evolution to a leading regional bank.

Well I won't rehash those comments I want to reiterate that todays banking landscape offers tremendous opportunity for service oriented bank like valley.

The recent acquisition of the West Chester Bank and the pending acquisition of bank Leumi will enhance our competitive position and ability to capitalize on this opportunity.

These partners will bring us new business capabilities and access to geographies that will enhance our competitive position and support our growth targets.

By the end of 2022, <unk> will be well over $50 billion in assets with a high quality core funded balance sheet and strong capital position.

And todays banking landscape. This is a very unique value proposition.

With that said the exceptional progress we have made as a standalone entity should not be overlooked.

Our adjusted 2021, ROA of 118% is nearly 40 basis points above our 2017 level.

This improvement was not dependent upon reserve releases.

Rather it is the result of net interest margin stability and consistent profitable organic growth.

As I think back on 2021, I'm proud of our ability to navigate COVID-19 uncertainty early on.

During the year, we recognized a mere $15 million of net charge offs equated.

Sequentially, just five basis points of average loans.

This incredible result is a testament to our lending and credit culture.

I'm equally proud of our ability to quickly pivot to an offensive position, which enabled us to generate significant organic loan growth and identify ideal merger partners during the year.

Looking ahead, I expect 2022 to be about execution.

Execution on the integration of our acquisitions.

But perhaps as importantly on the organic growth opportunities that exist for us.

As a relationship focused commercial bank, we strive to be consistently in tune with our clients' financial needs.

This has been a key driver of recent originations and will continue to support our organic growth going forward.

With significant M&A and technology disruption around us there is an increasing pool of potential new clients, which will provide an additional growth lever for valley.

We are excited by the team we have in place and are confident they have the right support and technology to capitalize on these opportunities.

With that I'll turn the call over to Mike to discuss some of the quarters financial highlights.

Thank you IRA turning to slide six you can see values recent net interest income and margin trends with and without the impacts of Triple P.

During the quarter net interest income increased $14 million or approximately 5%.

This was primarily the result of strong organic loan originations throughout the year three.

$3 million of noninterest income from Westchester and continued interest expense reductions.

On a reported basis net interest margin increased eight basis points to three 2% to 3%.

Exclusive of Triple the margin increased three basis points to 310%.