Valley National Bancorp (NASDAQ:VLY) Q4 2023 Earnings Call Transcript

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Valley National Bancorp (NASDAQ:VLY) Q4 2023 Earnings Call Transcript January 25, 2024

Valley National Bancorp misses on earnings expectations. Reported EPS is $0.22 EPS, expectations were $0.25. Valley National Bancorp isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by, and welcome to the Q4 2023 Valley National Bancorp Earnings Conference Call. [Operator Instructions] Please be advised that today’s call is being recorded. I would like to turn the call over to your host, Mr. Travis Lan. Please begin.

Travis Lan: Good morning, and welcome to Valley’s fourth quarter 2023 earnings conference call. Presenting on behalf of Valley today are CEO, Ira Robbins; President, Tom Iadanza; and Chief Financial Officer, Mike Hagedorn. 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 valley.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 industry.

Valley encourages all participants to refer to our SEC filings, including those found on Forms 8-K, 10-Q and 10-K for a complete discussion of forward-looking statements and the factors that could cause actual results to differ from those statements. With that, I will turn the call over to Ira Robbins.

Ira Robbins: Thank you, Travis. In the fourth quarter of 2023, Valley reported net income of $72 million and earnings per share of $0.13 exclusive of non-core items, including the one-time special FDIC assessment tied to the year’s bank failures. Adjusted net income and EPS were $116 million and $0.22 respectively. While I’m pleased with the quarter’s balance sheet trends, I’m disappointed with the earnings and profitability metrics, which I will discuss shortly. On the positive side, we made progress enhancing C&I growth while curtailing commercial real-estate originations. This enabled us to both accrete organic capital and reduce funding needs. On the deposit side, we added a remarkable 14,000 net-new consumer households and 8,000 net-new commercial deposit relationships during the year.

This represents 4.5% growth in consumer households and 10.5% growth in commercial relationships from the same-period a year-ago. The ongoing addition of new deposit clients is critical as it directly relates to Valley’s franchise value and our future earnings potential. Our new customer growth was broad-based across all of our geographies and I might add was undertaken, against the backdrop of a difficult external environment when mid-sized banks like Valley were too often front-page news. During the quarter, our new relationships, helped to generate strong customer deposit inflows, which enabled us to significantly reduce our reliance on broker deposits. While customer deposit inflows were exceptional, the organization wide focus on ensuring a successful core conversion in October likely led us to take our eyes off the ball relative to deposit pricing.

There is no doubt that this negatively impacted net interest income during the quarter and in a few minutes, Mike will illustrate some of the subsequent efforts that we’ve undertaken to manage these deposit costs going forward. From a strategic perspective, we are refocusing on holistic customer profitability and will return to pricing deposits in consideration of balance and return as opposed to just balance. The quarter was also impacted by a few additional factors worth calling out. First, waived service charges and proactive efforts taken to supplement customer support both associated with our core conversion weighed on quarterly earnings by an estimated amount equaling approximately $0.01 per share. These efforts were enacted out of an abundance of caution to ensure that our customer experience smoothly transition to our new system.

I’m pleased with the customer response to our core conversion, but acknowledge that some of the amounts of the excess support costs will persist in the first quarter as well. Secondly, our provision was partially elevated as a result of a loan charge-off in our commercial premium finance business. The after tax impact of the associated provision was approximately $0.01 per share as well. This business line has approximately $275 million in outstanding balances and we have an agreement in-place to sell this business and a portion of the outstanding loans, at what is expected to be a modest premium during the first quarter of 2024. While this quarter’s earnings are not satisfactory, I continue to believe that our strategic progress over the last few years, position us well in the evolving banking landscape.

The financial consistency that we have achieved in support of the strategic evolution is evident in our tangible book-value growth results. Our stated tangible book-value has increased 52% since 2018, which is more than double our proxy peers at 25%. Our value-creation as measured by tangible book-value plus the dividends, we have paid out totaled 90% since 2018 or more than 1.7 times our proxy peer median of 53%. From a balance sheet perspective, we have successfully transformed and diversified our funding base. At the end of 2017, approximately 92% of our deposits were held in our branch network. By utilizing technology to expand our delivery channels, and establishing new growth-oriented deposit verticals, we have reduced our reliance on branch deposits to just 65% today.

From a geographic perspective, 78% of our total deposits were in the Northeast branches in 2017. Today that number is down to just 45% of total deposits. Our focus on geographic diversity and holistic relationship banking has benefited the asset side of our business as well. In 2017, 78% of our total loan portfolio was in New Jersey and New York. That composition has declined to just 55% today. In 2014, we entered Florida with the acquisition of first United Bank, which had just over $1 billion in loans. Through additional strategic acquisitions and targeted organic efforts in this dynamic growth-oriented market, our Florida loan portfolio has expanded beyond $12 billion. There continues to be significant diverse commercial growth opportunities available to us in Florida and across our entire footprint.

The proactive evolution of our technology infrastructure is a less tangible, but equally significant achievement for our organization. We have recruited and developed a strong pool of technology talent which has helped us to modernize our infrastructure and positions us to be on the leading-edge of further advancements in the banking space. Our technology adoption has allowed us to scale the franchise with limited net headcount growth. Since 2018, we have nearly doubled our asset-base from $32 billion to $61 billion with a mere 17% increase in headcount. Our recent core conversion aligned technology across our company and provides additional capabilities, which we look-forward to leveraging for our clients. As we move past the conversion, we anticipate that further efficiencies will also emerge.

We have also focused on enhancing a more uniform data infrastructure, which allows us to react quickly and purposefully to changing market dynamics. An internal AI working group has been established to help us determine appropriate potential use cases and to begin to execute on related opportunities. I now want to pivot to our strategic imperatives for the coming year. While none of these are new initiatives for Valley, we continue to believe that they would drive shareholder value over the long-time. First, we need to continue to drive core deposits to the bank. We have an incredible service-oriented branch network across our dynamic geographic footprint. We’ll generate more consumer and commercial activity out of these locations in 2024. As the curve increasingly normalizes, we will further leverage the existing specialty niches that we have established and will build-on our momentum for the second half of 2023.

Secondly, we will continue to de-emphasize investor commercial real-estate lending in favor of C&I and owner-occupied CRE. We have restructured our commercial banking organization to better align expertise and experience with opportunities in our markets and business lines. Our enhanced treasury management capabilities and product offerings will support expanded wallet share among our customer-base and help us to acquire new customers on the commercial side. We have also adjusted our incentive programs in support of our deposit-gathering and lending goals, which will drive further strategic alignment across the entire organization. Finally, we will continue to grow our differentiated non-interest income businesses to diversify our revenue base.

Through organic and acquisitive efforts, we have developed a robust suite of fee income products and service offerings for our growing customer-base. The recent enhancements of our treasury management offering will help to offset certain capital market headwinds associated with lower swap related revenues in 2024. The industry challenges of the past year confirmed to me that we have undertaken the right long-term strategy and I’m pleased with our ability to navigate this difficult year. 2024 will be about accelerating our progress towards achieving our strategic initiatives and improving our performance as we continue to mature. As we execute on these initiatives, I want to reiterate that we continue to prioritize tangible book-value growth.

A man at a local bank branch checking the balance of his NOW account.

We believe that consistent growth in tangible book-value would drive shareholder value over-time and we continue to expect to outperform our peers on this metric. With that, I will turn the call over to Tom and Mike to discuss the quarter’s growth and financial results.

Thomas Iadanza: Thank you, Ira. On Slide 6, you can see the quarters deposits trends. Direct customer deposits increased approximately $1.6 billion to largely offset the significant $2.3 billion reduction in indirect deposits. The meaningful reduction in our reliance on wholesale deposits was a key highlight of the quarter. We generated strong growth in our interest-bearing transaction accounts and we’re pleased by the slowdown in non-interest deposit runoff. That said, we acknowledge, at a competitive interest-rate was one of the tools used to support our generation efforts during the quarter. Still, the pace of deposit cost increases slowed. And in a moment Michael outlined efforts, which we have undertaken to control interest expense on a go-forward basis.

The next slide provides more detail on the composition of our deposit portfolio by delivery channel and business line. Traditional branch deposits increased approximately $600 million during the quarter. This growth was spread across our geographic footprint. Our specialty niches, increased approximately $1 billion as well with key contributions from our online delivery channel and technology deposit team. Turning to the next slide, you can see the continued diversity and granularity of our deposit base. No single commercial industry accounts for more than 7% of our deposits. Our government portfolio remains diversified across our footprint and is fully collateralized relative to state collateral requirements. Slide 9 provides an overview of our loan growth and portfolio composition.

At the top-left, you can see proactive growth slowed down, which occurred throughout 2023. Ultimately, we achieved the lower-end of the 7% to 9% growth target that we had laid out at the start of the year. Annualized loan growth slowed consistently as the year progressed, illustrating our ability to be responsive to changing market dynamics. The following slide breaks down our commercial real-estate portfolio by collateral type and geography. As a reminder, we have an extremely granular loan portfolio, which is well-diversified by collateral type and geography. Our debt service coverage and loan-to-value metrics remain very attractive. We continue to closely monitor pools of maturing and resetting loans and believe that our borrowers are well-positioned to absorb the pass-through of higher rates.

This reflects consistent underwriting discipline at conservative cap rates and significant stress-testing efforts at origination. The next two slides provide additional details around our multifamily and office portfolios. From a multifamily perspective, our $8.8 billion portfolio includes $2 billion of co-op loans with an extremely low loan-to-value. Exclusive of our co-op portfolio our Manhattan multifamily exposure is a mere $600 million, which you can see in the last column of the table. The remainder of the portfolio is well-diversified across our footprint with low average loan sizes at attractive loan-to-value and debt service coverage ratio metrics. With that, I will turn the call over to Mike Hagedorn to provide additional insight into the quarter’s financials.

Michael Hagedorn: Thank you, Tom. Slide 13 illustrates Valley’s recent quarterly net interest income and margin trends. While end-of-period noninterest-bearing deposits stabilized the decline in noninterest deposits on an average basis weighed on quarterly net interest income by approximately $4 million. Throughout the quarter, we replaced maturing direct and indirect CDs with relatively high-yielding interest-bearing transaction accounts and promotional retail CDs which was the cost of our significant customer deposit growth during the quarter. The right-side of this page outlines efforts that have been undertaken to more precisely, manage our funding costs on a go-forward basis. We have cut-back the high-yield savings rate in our online channel, but remain competitive.

We have also significantly reduced our one year CD rate which will help to mitigate the repricing issue that we faced during the recent quarter. Finally, we are working with our relationship bankers to ensure that deposit rates are reasonable in the context of holistic customer profitability. In the few quarters following the industry’s challenges in March, we priced deposit products to ensure that direct customer balances rebound. As we continue to move past these challenges, we will price products with a more even consideration of balances and profitability. Turning to the next slide, you can see that non-interest income on an adjusted basis was generally stable from the third quarter of 2023. Deposit service charges declined sequentially as we waived certain transactional fees around the time of our core conversion.

Other than this growth trends were relatively strong for the quarter, despite the headwind of swap revenues. On the following slide, you can see that our non-interest expenses were approximately $340 million for the quarter. Adjusting for our $50 million FDIC special assessment and certain other non-recurring litigation and merger charges non-interest expenses were approximately $273 million on an adjusted basis. Compensation costs continue to be very well-controlled. The sequential expense increase was primarily due to higher traditional FDIC assessment costs, consulting costs, occupancy and advertising expenses, and the seasonal uptick in other business development expenses. A portion of the quarter’s expense increase was associated with certain consulting and customer support initiatives associated with our core system conversion in October.

While the customer experience, associated with our conversion has been extremely positive some of these costs will have a tail into the first-quarter. As you know, the first-quarter also has traditional seasonal headwinds associated with payroll taxes. We are very pleased with our ability to proactively control headcount and associated compensation expenses throughout 2023. We expect that 2024 will be a more normal year in terms of expense trajectory and as you will see shortly, we anticipate Mid-single-digit expense growth in the coming year. Slide 16 illustrates our asset quality trends for the last five quarters. While non-accrual loans ticked up somewhat during the quarter, they remained relatively flat on a year-over-year basis. Net charge-offs were $17 million during the quarter and included approximately $5 million associated with our commercial premium finance business, which is under an agreement to sell during the first-quarter of the year.

As a result of our higher provision, our allowance for credit losses for loans increased one basis-point during the quarter to 0.93% of total loans. The next slide illustrates the sequential increase in our tangible book-value and capital ratios. Tangible book-value increased nearly 2% from the third quarter of 2023 and benefited from a reduction in the OCI impact associated with our available-for-sale securities portfolio. We are pleased that during the year, we were able to support our strong loan growth and organically accrete regulatory capital. Based on our expected loan growth in 2024, we would anticipate this trend to continue. We lay out our expectations for the coming year-on Slide 18. We anticipate generating mid-single-digit loan growth with a focus on C&I and non-investor commercial real-estate in 2024.

Based on consensus interest-rate expectations for 2024, we would anticipate net interest income growth between 3% and 5%. Non-interest income should grow between 5% and 7% on an annual basis as headwinds in our swap business are more than offset by continued scale in our wealth, insurance and tax advisory businesses as well as our recently enhanced treasury management capabilities. Noninterest expenses should grow approximately in-line with revenue, higher FDIC costs and inflationary pressures are offset by savings from our core conversion and the continued benefits of our previously-announced expense initiatives. Factoring this guidance together, we expect 2024 EPS to come in just slightly lower than the existing 2024 consensus estimates of $1.08.

With that, I’ll turn the call-back over to the operator to begin Q&A. Thank you.

Operator: [Operator Instructions] Our first question comes from the line of Frank Schiraldi of Piper Sandler. Your line is open. Pardon me, Frank your line is open.

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Q&A Session

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Frank Schiraldi: Sorry. Just on the — NII guide. I recognize you guys follow the market and the forward curve here, and most of those rate assumed rate cuts are back-loaded in the year. What sort of annualized basis, or annualized pickup do you get, in terms of either NII or NIM. From a given 25 basis point – what’s the assumption?

Thomas Iadanza: So, I want to make sure I understand the question. You want to know what just the impact would be of a single 25 basis point increase or cut, I’m sorry?

Frank Schiraldi: Yes, basically, as you get if we get three or four cuts. I mean I’m just trying to assume, or get a sense of what 25 basis points does – on average for the NIM, or NII in your modeling?

Thomas Iadanza: So, I’m going to direct you back to our guidance around 3% to 5%. So, what we’re expecting right now in 2024 is roughly 175 basis points. That will affect most short end of the curve as you get less inversion in the curve. And that first increased does start in the end of March, you don’t get much in the first quarter. But you are correct, they are more back-loaded on the cuts into the fourth quarter of 2024. So, while I’m not prepared to answer your question on what is exactly a 25 basis point cut, because it’s going to depend upon the mix of the funding sources at that time. For the full year, we’re expecting 3.5% increase in NII. And that should drive a slightly higher NIM year-over-year.

Thomas Iadanza: And Frank conceptually, we’re relatively neutrally positioned to the short-end of the curve, so there not a significant move, based on if those cuts don’t materialize. We’re much more exposed to the longer end as it impacts the – benefit that we’ll get as our fixed-rate loans mature and reprice.

Frank Schiraldi: Okay. So, I guess over the full curve, you’re still liability sensitive, but more neutral to the front-end?

Thomas Iadanza: Yes, that’s correct.

Frank Schiraldi: Okay. And just kind of the – I don’t know more theoretical question. In terms of the business mix has changed a bit here, over the years with the specialized deposit opportunity. The opportunity on the C&I side, which you guys continue to see in 2024 in a more normally sloped yield curve. What do you think sort of a normal sort of margin is, a normalized sort of NIM is, for Valley and the way you’ve built the balance sheet here?

Ira Robbins: Yes, and this is Ira. I think it’s a lot higher. I mean, obviously being an inverted curve for three years running the balance sheet, in which we do where we try to take as much of a neutral stance as we can. It’s a real challenging environment for us. That said, as the curve does get to a more normalized focus. We do anticipate significant margin expansion as we get back to an appropriate environment. We’ve done a really good job. Shifting the commercial growth within the organization. We’ve been running a 10% CAGR on C&I growth for an extended period of time. And as you mentioned, the diversification of the funding base really will help us, as that curve gets a little bit more normal. And we can get back, to an appropriate deposit pricing approach across the organization.

Frank Schiraldi: Okay. Great. And then, if I could just sneak in one last one on that kind of front. In terms of the specialized deposits coming on board in the quarter. The growth there and just thinking through the betas on your deposit book, the specialized versus the deposits in the branch. Does – are the betas expanding here given the national businesses and would that help you – obviously help you maybe to a great degree in a down rate environment?

Ira Robbins: I mean, those definitely have a bit of a higher beta in some of those national businesses and I think that refers back to what Travis said that, it’s going to be a bit more neutral. When we have some of that curve impacted right-off the bat. I think the mix-shift from out of noninterest-bearing really impacted us during the course of the year. So, that’s changed a little bit of the assets liability. Right so, we do have more sensitivity on the downside on the deposit costs and what we did when we were running 28% to 29% non-interest bearing deposits, as those are now sitting in – interest interest-bearing deposits. So that is going to be a benefit to us. But I think it’s really mentioned, it’s the diversity and the granularity that sits within that deposit book that we’re really excited about and what the opportunity is.

As we mentioned earlier on the call, I think deposit pricing, got a little bit away from us. As we are focused more on the core conversion. That said I do believe it’s an easy fix. We will focus on, and make sure that 2024, gets back to results that you would expect from us.

Frank Schiraldi: Okay. Great. I appreciate the color. Thanks.

Ira Robbins: Thanks.

Operator: Thank you. One moment please. Our next question comes from the line of Steve Moss of Raymond James. Your line is open.

Steve Moss: Good morning. Just following-up here on the asset liability side – of the business. Just curious with regard to, how much of your fixed-rate loans and securities reprice in 2024?

Ira Robbins: Yes. Steve, so we’ve talked in the past, we have $20 billion of fixed-rate loans. It’s not necessarily linear. So, we have more. It’s more of our fixed-rate loans repriced in the second-half of the year, than do in the first half. But in total, it’s between $3 billion and $4 billion that would reprice this year. But again that’s relatively back-loaded.

Steve Moss: Okay. And then on the – security side. I’m assuming there’s probably just minimal cash flows for the upcoming year?

Ira Robbins: Yes, duration of securities portfolio is extended to seven years, give or take. We get. Yes, it’s really de minimis. It’s a $5 billion portfolio, it’s a couple hundred million dollars in the year.

Steve Moss: Okay. And then on credit here, just curious to get a little more color on the uptick in C&I and CRE. In case, it sounds like some of it – from the premium finance that you charged-off this quarter, but just kind of curious as to what the loan types are in any incremental color you can give?

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