Valley National Bancorp (NASDAQ:VLY) Q3 2023 Earnings Call Transcript

Valley National Bancorp (NASDAQ:VLY) Q3 2023 Earnings Call Transcript October 26, 2023

Valley National Bancorp reports earnings inline with expectations. Reported EPS is $0.26 EPS, expectations were $0.26.

Operator: Good day and thank you for standing by. Welcome to the Third Quarter 2023 Valley National Bancorp Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Travis Lan, Head of Investor Relations. Please go ahead.

Travis Lan: Good morning and welcome to Valley’s third 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.

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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’ll turn the call over to Ira Robbins.

Ira Robbins: Thank you, Travis. In the third quarter of 2023, Valley reported net income of $141 million and earnings per share of $0.27. Exclusive of non-core items, adjusted net income and EPS were $136 million and $0.26, respectively. Our quarterly results were highlighted by organic capital growth, sound asset quality metrics, improved core deposit flows, and solid expense control. The current interest rate environment reflective of an inverted curve has challenged traditional banking models, and we have not been insulated from these pressures. That said, while the duration of the current inversion has exceeded original expectations, and is anticipated to continue for the foreseeable future, we do not intend to change our foundational business model.

Our net interest income declined at a much slower pace than in recent quarters, and we believe that NII is near the bottom of its decline, all else equal. While the external environment remains fluid, our focus on executing our strategic initiatives remains steadfast. One of our strategic efforts over the last few years has been to transform our core operating environment to allow flexibility in integrating unique delivery channels, enhancing Fintech integrations, and positioning the bank for scalability without the traditional technology expense hurdles. I’m pleased to report that during the first weekend of October, our team worked tirelessly to complete the transformational conversion of our core operating system. This was a massive undertaking which required months of planning, development, and testing.

Valley is now operating on a single system with bespoke delivery channels, and I couldn’t be prouder of our discipline to execute on this project, which I reiterate, was done in the face of an extremely challenging operating environment. This technology conversion is the natural progression of a cultural evolution that has occurred over the last few years. We have collectively developed a growth-oriented mindset, which has been evident in our recent financial results. To support this mindset, we continuously strengthen and develop our capabilities to bring us more in line with the largest players in our industry. Our bankers now have a more robust infrastructure and we expect to see significant opportunities to leverage these new technologies and drive additional growth as the environment normalizes.

Our successful conversion was yet another example of our discipline and proven ability to execute. As we enter 2024, we anticipate generating both expense efficiencies and revenue scale resulting from our common core platform. As we have moved to a cloud based infrastructure, We’re not burdened with the massive hardware costs that are typically associated with type of technology investments. We are more nimble today than we were a month ago and the opportunities ahead of us remain significant. 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. Slide 4 illustrates approximately $300 million of total deposit growth during the quarter. We experienced strong growth in interest bearing transaction account and retail CDs, which offset non-interest bearing deposit declines and indirect CD maturities. The pace of non-interest bearing deposit runoff has flowed, but mix shift to interest bearing products has continued to weigh on our total deposit costs. Slide 5 provides more detail on the continued diversity of our deposit portfolio. during the quarter, we benefited from stability in our branch-based deposits and strong growth in our specialized verticals. Inflows were particularly strong in our national deposits business and through our online channel.

These dynamics enabled us to pay off some maturing indirect CDs during the quarter. We also continued to reduce our adjusted uninsured deposit exposure and have significant coverage with cash and high quality liquidity. Slide 6 further illustrates the 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. Now, turning to Slide 7, you can see an overview of our loan growth and portfolio composition. Annualized loan growth on a year-to-date basis has slowed consistently as the year has progressed. Originations declined meaningfully during the quarter as we require wider spreads on new loan.

These efforts continue to result in higher new origination yields. Slide 8 breaks down the diversity of our commercial real estate portfolio by collateral type and geography. As a reminder, we have an extremely granular loan portfolio with an average loan size of roughly $5 million. From a metric perspective, our weighted average LTV remains at 58%. As interest rates have increased, net service coverage ratios have declined somewhat to 1.7 times. 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 following slide illustrates the continued strong metrics and granular composition of our diverse office portfolio.

With that, I will turn the call over Michael Hagedorn to provide additional insight on the quarter’s financial.

Michael Hagedorn: Thanks Tom. Slide 10 illustrates Valley’s recent quarterly net interest income and margin trends. The sequential $7 million decline in net interest income was less than half of the reduction experienced in the second quarter of the year. While asset yields continue to improve, continued pricing competition and mix shift drove funding costs higher. On the second quarter call, we indicated that we were observing signs of net interest income stabilization. During the quarter, monthly net interest income was generally stable and higher than the June level. Our fully tax equivalent net interest margin declined a modest three basis points on a linked quarter basis versus 22 basis points in the second quarter of 2023 and has been generally stable over the last few months.

All else equal, we expect fourth quarter net interest income to be relatively in line with the third quarter level. By the end of the quarter, our liquidity position has been effectively normalized Absent abnormal environmental factors, we expect cash to remain generally consistent with third quarter levels. Moving to Slide 11, we generated nearly $59 million of non-interest income for the quarter as compared to $60 million in the second quarter. Exclusive of approximately $6 million of non-core items, adjusted non-interest income was closer to $52 million for the quarter. The decline was primarily related to lower capital markets fees associated with our slower loan growth. Other business lines were generally stable. On slide 12, you can see that our non-interest expenses were approximately $267 million for the quarter or approximately $264 million on an adjusted basis.

Adjusted expenses declined from the prior quarter despite an increase in certain technology cost, partially associated with our successful core conversion. Specifically, we began to see the benefits of recent headcount reductions about midway through the quarter. FDIC assessment costs and outside consulting fees also declined on a sequential basis. We continue to execute on previously identified efforts to slow future expense growth. Legacy Valley and [Indiscernible] have now joined on a common core. After certain adjustment period, we expect the core conversion to result in the next wave of previously announced cost savings early in the new year. To retaliate, our focus is on controlling expenses in a face of revenue pressures, which have resulted from the inverted yield curve.

Turning to Slide 13, you can see our asset quality trends for the last five quarters. Non-accrual loans have been effectively flat for the last three quarters. Early stage delinquencies ticked up during the quarter, but remained well below the average level of the last 12 months. Third quarter net charge offs declined somewhat from recent levels. On Slide 14, you can see that tangible book value increased approximately 1.4% for the quarter and is up nearly 10% from a year ago. Our balance sheet positioning has enabled us to avoid the significant challenges that other peers have faced related to the OCI impact associated with available for sale securities. We manage all risk areas prudently and are proud in our ability to insulate tangible capital from this headwind.

Tangible common equity to tangible assets increased to 7.4% during the quarter as a result of our normalized cash position. As loan growth slowed, our risk based regulatory capital ratios have increased between 16 and 18 basis points as compared to the second quarter of 2023. We continue to prioritize organic capital growth in this challenging environment and are prudently managing our balance to incrementally strengthen our position. With that, I’ll turn the call back to the operator to begin Q&A. Thank you.

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Q&A Session

Operator: Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Frank Schiraldi with Piper Sandler. Please go ahead.

Frank Schiraldi: Good morning. Just on the trajectory of NII/NIM, I mean, you talked about, the hopeful trough here. In a higher for longer scenario, just thinking out into 2024, do you think there’s some stabilization in NIM, and then you get a reversal, from there. So, you get a little bit of a trajectory upwards, or is it more sort of like and higher for longer, sort of, bouncing along the bottom for a period of time? Just wondering your general thoughts there.

Michael Hagedorn: Hi, Frank. It’s Mike. I think that when you look at the trajectory of NIM in 2023, as we said in our prepared remarks, we’ve been in that mid-290s to low-290s range since April. And when you look at the cost of deposits, you’ll notice that from fourth quarter to first quarter, they were up 60 basis points from first quarter 2023 to second quarter 2023, they were up 49, and they were up 49 into third quarter as well. So, we’re starting to see a normalization, both in the cost, but also in the NIM. In a higher for longer rate environment, I think a couple of things would happen that would, all things being equal result in a slightly higher NII and slightly higher NIM. The first of those — and it’s been true for all of 2023, the biggest driver of the compression on our NIM has been the rotation out of non-interest bearing and into interest bearing product.

So, I would think in a higher for longer environment, there is some place, some equilibrium that we see a plateau in that. Second, you got to keep in mind that we’ve had a very large liquidity build, both at the end of the first quarter and throughout the second quarter, as a result of all the chaos that was created, with the bank failures, earlier this year, that is completely off our balance sheet as of 9/30. And then when you go forward and you kind of think about deposits, stabilizing, I think the thing that will drive at least in current modeling, the thing that will drive, NIM expansion and NII increases is going to be the repricing on our assets, earning assets, but more specifically loans. And as we look at our modeling, we know what our fixed rate book, repricing is along with the repricing opportunities that we have throughout 2024 and the adjustable rate book.

So, we would expect that to be the main driver of a NIM expansion next year.

Frank Schiraldi: Okay. Great. Appreciate all the color, Mike. And then just as a follow-up to that, in terms of the brokered balances, it looks like you guys have had some really good success, raising customer deposits and so you let these, roll off. I guess, do you expect that to continue. And if so, as you look out at the pay at maturization payable, when do you expect or how quickly do you expect brokered balances to kind of, fall here?

Michael Hagedorn: Yes. So, our current, thinking and our current modeling is that we will see further reduction in our brokered balances, and that’s certainly one of our goals. But I want to make sure everybody understands how we’ve been using brokered. We’ve been using brokered throughout 2023 to fill the gaps especially earlier in the year, we had much higher loan growth to fill the gaps on the balance sheet expansion while also paying very close attention that we’re not repricing the back book of our deposit — our core deposit base. And the second thing that we’ve done is we’ve used that, in those stop gap measures, we’ve used both duration and rate in that portfolio to help manage our NIM and NII. And so I well, I know they have a bad connotation sometimes. They’ve been a very effective and the market has been excellent for us to use that in certain times and in certain circumstances and will very effectively.

Frank Schiraldi: And just lastly on that front, in terms of, as you look at the indirect market versus what you’re able to get directly from customers here. Is there much of a difference in terms of pricing, in terms of, new brokered versus a new direct?

Michael Hagedorn: Yes. The inversion of the curve probably is the biggest impact on that. If you’re talking about exactly the same duration, I would say the incremental cost of deposits is fairly close to one another. So, there may be 10 basis point difference, but it’s not that remarkably different. So, I think again, I’d go back to my previous comments is you want to use that for both rate and duration, but in the case that you’re asking about, you probably want to manage the duration in this inverted curve.

Ira Robbins: Frank its Ira. I would just I would just add to that when we think about the incremental piece of deposits, as Mike alluded to earlier, they were significant, demand for us to put some of those incremental deposits on based on the loan growth we were seeing, and that obviously ratcheted up the incremental cost of some of these deposits. As we now scale back some of the loan growth, the demand for those broker deposits and higher CDs have actually come a bit down. And we’re still originating court deposits. I think as we spoke about last time on the call. The overall deposit originations for this quarter were around 3.70, 3.80 ish. So, up so on a blended basis, in marginal deposits are coming in much cheaper than what these directs are. And as we curtail the loan growth, we definitely anticipate some expansion on margin based on that increment will be loan that’s coming on.

Frank Schiraldi: Great. Okay. Appreciate all the color guys. Thanks.

Ira Robbins: Thank you.

Operator: Thank you. Our next question comes from Matthew Breese with Stephens. Please go ahead.

Matthew Breese: Hey, good morning everybody. Maybe just sticking with the NIM, can you provide what the monthly NIM was across the quarter and is the September — the September NIM, a good launch point in the fourth quarter about where it could shake out for the fourth quarter?

Travis Lan: Matt, this is Travis. It’s on a monthly basis, July with 291, August 292, and September of 291. So, when we say it was pretty stable throughout the quarter, I mean, we really mean it. So, you can use it as September end and the quarter with the same number. But, yes, that’s a good launch point.

Matthew Breese: Thank you. And then I was hoping also for some additional color on near-term loan growth outlook and maybe perhaps when you would feel comfortable reaccelerating loan growth.

Thomas Iadanza: Hey, Matt. it’s Tom. yes, the loan growth, the fact is slowing it down, really customer related, the uncertainty of the rate market as well as widening spreads. Has slowed down their activity. We still service those valued real estate customers, when they need it and we continue to grow that portfolio just had a much slower base. I just want to point out our C&I portfolio has grown 12% over the last year. So our focus is really on that relationship driven C&I piece. We’re still getting higher percent growth in the Florida market and stable growth here in the Northeast. I would expect that growth in the fourth quarter to be in a similar fashion to the third quarter and will be in that range of 7% to 9% for the year.

Matthew Breese: Great. Okay. And then, Ira, just acknowledging yours and Valley’s relationship with Bank [Indiscernible] and first just wishing everybody on your end and end on [Indiscernible] end the best as they deal with the horrific events over in Israel. In light of that, I was curious if events overseas will have and because of the partnership, any impact on your bank balance sheet or private client group in any way?