Yahoo Finance Valley National Bancorp (NASDAQ:VLY) Q1 2024 Earnings Call Transcript
Valley National Bancorp (NASDAQ:VLY) Q1 2024 Earnings Call Transcript April 25, 2024
Valley National Bancorp misses on earnings expectations. Reported EPS is $0.19 EPS, expectations were $0.2. 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: Welcome to the Valley National Bancorp Earnings Conference Call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question-and-answer session [Operator Instructions]. Please be advised that today's conference is being recorded. I would like to turn the call over to your first speaker today, Travis Lan. Please begin.
Travis Lan: Good morning. And welcome to Valley's First Quarter 2024 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 Web site 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’ll turn the call over to Ira Robbins.
Ira Robbins: Thank you, Travis. During the first quarter of 2024, Valley reported net income of $96 million and earnings per share of $0.18. Exclusive of noncore items, adjusted net income and adjusted earnings per share were $99 million and $0.19 respectively. The quarter's results were impacted by an outsized provision for loan losses, which I will discuss shortly. On a pretax pre-provision basis, we saw a positive inflection this quarter. The sequential downward trend in net interest income slowed meaningfully despite the lower day count during the quarter. This reflects the benefit of asset pricing and our efforts to better control funding costs. Fee income results were strong, supported by certain unique businesses, including tax credit advisory.
Finally, noninterest expenses were extremely well controlled despite the seasonal headwind associated with higher payroll taxes. Despite the continuation of the inverted yield curve and other environmental challenges, I am pleased with the stronger pretax pre-provision earnings results this quarter. I'm also pleased with the quarter's balance sheet strength and credit quality performance. On Slide 4, we outlined certain efforts made to curtail loan growth, enhance reserve coverage where needed in the portfolio and incrementally optimize our funding base. Total loans declined nearly $300 million during the quarter as a result of our proactive efforts to participate out a portion of certain commercial real estate and construction loans, and the sale of our commercial premium finance business.
These sale transactions each occurred at or above par and incrementally benefit our commercial real estate concentration, capital ratios and reserve levels. Our allowance for credit losses for loans as a percentage of total loans increased 5 basis points to 0.98% during the quarter. Meanwhile, our past due and nonaccrual loans both declined as compared to December 31, 2023. The higher provision and associated reserve coverage reflects internal risk rating migrations resulting from our continuous monitoring and rigorous stress testing of the commercial loan portfolio. During the quarter, an additional 1% of loans transitioned into either our criticized or classified loan buckets. While we remain comfortable with the sponsorship, collateral, support and potential loss content of these loans, criticized loans require elevated reserve coverage under CECL.
We are comfortable with the current reserve coverage levels but anticipate that the allowance could trend slightly higher over the next few quarters. Our focus on and expertise in commercial real estate lending has generated strong and stable risk adjusted financial results throughout our history. The strength of our commercial real estate underwriting and the consistently industry leading loss content of our portfolio has contributed to significant shareholder value creation through above average tangible book value growth. Our strong network of borrowers have banked with Valley for decades and have performed very well in other periods rising interest rates. We remain very confident with our capital allocation and in future credit performance of our commercial real estate portfolio.
That said, I acknowledge that our perceived concentration in commercial real estate has recently amplified the volatility in our company's valuation. This volatility is based purely on perception and is not reflective of our financial results nor the strength of our credit quality and balance sheet. Still, we exist to serve our key stakeholders. And while I'm proud of our ability to exceed the expectations of our clients, communities and employees, I acknowledge that the volatility experienced by our shareholders is not sustainable. Commercial real estate is a wonderful asset class and one in which our differentiated approach continues to create incredible value. We will remain active in this space but we'll manage our concentration more efficiently going forward.
Our diversifying C&I initiatives will continue to accelerate and we will further enhance our financial flexibility. These efforts are consistent with our established strategic plan, and I believe that accelerating them will help to reduce the volatility in our valuation. With this in mind, you can see our near and intermediate term expectations for certain balance sheet metrics on Slide 5. We expect to have approximately 9.8% Tier 1 common equity, 440% commercial real estate to risk based capital, an allowance coverage ratio above 1% and a loan to deposit ratio around 100% by year end 2024. These metrics are consistent with the strategy which we have discussed previously and our ongoing efforts to further strengthen our balance sheet and enhance financial flexibility.
The following slide updates our previously provided guidance. The downward revision to our net interest income forecast reflects slower loan growth and the modest funding mix shift related to lower noninterest bearing deposit balances during the first quarter. We anticipate that the downward revision in net interest income for the year will be largely offset by lower noninterest expenses relative to our prior guidance. All else equal, this will leave pretax pre-provision income relatively in line with current consensus expectations. On Slide 7, we provide additional commentary on our base case net interest income scenario as well as some considerations related to our exposure to changing interest rates. As we have described before, our balance sheet is generally neutral to changes in short term interest rates.
We are more sensitive to movement in longer end rates, which impacted repricing of roughly 60% of our loans. Before turning the call to Tom, I wanted to highlight the underlying franchise value that we continue to create despite the volatility in our valuation. Since the end of 2017, we have grown reported tangible book value by 47% versus just 38% for our regional banking peers. Including the impact of distributed dividends, this increases to 91% versus just 70% respectively. This positive variance reflects our ability to enhance our franchise without meaningfully diluting tangible book value in overpriced acquisitions or through efforts to maximize near term results. Customer account growth is another key metric that gauges our ability to build and optimize our franchise.
Since year end 2017, we have more than doubled our number of commercial deposit accounts, which is in direct alignment with our strategic objectives. The ongoing addition of new deposit clients is critical as it supports our future earnings potential and financial consistency. This growth has been broad based across geographies and business line and we continue to work hard at sustaining this momentum. We also believe there is significant value in the geographic diversity that we have developed on both the asset and liability side of the balance sheet. At the end of 2017, nearly 80% of our commercial loans were concentrated in New York and New Jersey. That figure has declined to nearly 50% today as a result of our focus in Florida and other dynamic commercial markets.
We continue to develop exceptional service oriented banking teams across the country, which are focused on generating and enhancing the valuable commercial relationships that we have targeted. This progress has benefited the funding side of our bank as well. In 2017, 78% of our deposits were in Northeast branches. As of the end of first quarter that number has declined to 45%. We have diverse niche funding businesses and a robust branch network across Florida and Alabama. This diversity helps to insulate our funding base and provides unique and differentiated opportunities to further reduce our reliance on wholesale funding over time. On last quarter's call, I laid out three strategic imperatives for the coming year. Our early results indicate solid traction relative to enhancing our cost effective core deposit funding, the de-emphasis of commercial real estate and more revenue diversity.
As mentioned, we will continue to accelerate the diversification of our loan portfolio and I have all the confidence that we will continue to produce solid results. With that, I will turn the call over to Tom and Mike to discuss the quarter's growth and financial results. After Mike concludes his remarks, Tom, Mike, myself and Mark Saeger, our Chief Credit Officer, will be available for your questions.
Tom Iadanza: Thank you, Ira. Slide 9 illustrates the quarter's deposit trends. Total deposits declined slightly due to the intentional runoff of higher cost time deposits, which had matured. From a customer deposit perspective, this runoff was primarily offset by growth in interest bearing non-maturity deposits within our specialty deposit niches. Our ability to tactically reduce deposit pricing in certain product types and categories helped to meaningfully slow the pace of deposit cost increases during the quarter. Despite a rotation of approximately $200 million of noninterest deposits into interest bearing deposits, our total cost of deposits increased a modest 3 basis points. The next slide provides more detail on the composition of our deposit portfolio by delivery channel and business line.
Traditional branch deposits declined slightly as a result of the runoff of certain higher cost time deposits. That said, we saw stable deposit trends in our Southeast franchise. Our specialty niches increased slightly during the quarter as our online deposits and technology business continue to expand. Slide 11 illustrates the management actions which reduced loans during the quarter. Total loans declined nearly $300 million, driven primarily by commercial real estate and construction participations out of the bank. Importantly, these participations were executed with no negative impact to equity. We continue to monitor opportunities to further participate out certain loans and to enable certain maturing loans to refinance away from Valley.
The sequential reduction in C&I loans was due entirely to the sale of our commercial premium finance business and subsequent maturities in that remaining portfolio. We continue to focus our origination efforts on traditional C&I, owner occupied real estate and healthcare. On Slide 12, I would highlight that our loan to values are based on the most recent appraisal received on a property. The average life of these appraisals is approximately two and one and half years. Our debt service coverage ratios are calculated based on the most recent borrower financial information that we have, which is typically received at least annually. The following two slides provide additional detail on our multifamily and office portfolios. We continue to have modest exposure to New York multifamily loans and highlight that a mere $531 million or roughly 20% of that sub-portfolio has more than 50% rent controlled units.
Our office portfolio remains diverse by geography and supported by generally diverse cash flows with nearly 65% of our loans to multi-tenant properties. With that, I will turn the call over to Mike Hagedorn to provide additional insight into the quarter's financials.
Mike Hagedorn: Thank you, Tom. Staying on the CRE topic for a moment, Slide 15 illustrates the contractual maturities of our commercial real estate portfolio. We also included the LTV, DSCR and rate by maturity bucket for your benefit. This maturity schedule illustrates the minimal repricing risk of our loans maturing over the next few quarters. Slide 16 illustrates Valley's recent quarterly net interest income and margin trends. The modest sequential declines in both net interest income and net interest margin were primarily the result of one fewer day in the quarter. We strategically lowered deposit costs by approximately 40 basis points on nearly $10 billion of deposits, which helped to stabilize net interest income as the quarter progressed.
This helped to offset the headwind associated with lower average noninterest bearing deposits during the quarter. After shortening our liability duration during the first quarter, we locked in a small amount of long term funding at relatively attractive costs, which will further benefit net interest income during the second quarter, all else equal. Turning to the next slide. You can see that noninterest income on an adjusted basis improved meaningfully from the fourth quarter of 2023. A portion of this improvement was related to rebounding deposit service charges as some fees were waived around our conversion in the fourth quarter of 2023. Beyond this, we offset headwinds in swap revenue on commercial loan transactions with improved wealth revenues and a very strong quarter from our tax credit advisory business.
On that front, Dudley Ventures had certain tax credit transactions closed during the quarter, which had been delayed from the end of 2023. While demand for our tax credit advisory services continues to grow, we would anticipate that Dudley’s revenues will decline somewhat from this quarter's elevated levels. On the following slide, you can see that our noninterest expenses were approximately $280 million for the quarter. Adjusting for our $7.5 million FDIC special assessment and certain other noncore charges, noninterest expenses were approximately $267 million on an adjusted basis. This represents a 2% decline from the adjusted fourth quarter of 2023 and a mere 1% increase on a year-over-year basis. The quarter's increase in compensation costs was primarily the result of seasonal payroll tax impacts as headcount remains generally well controlled.
We saw notable reductions in our technology and consulting expenses as the costs associated with our core conversion in the fourth quarter of 2023 continued to run off. While revenue pressures have weighed on our efficiency ratio in recent quarters, our expense base continues to be stable relative to our balance sheet and well below peer levels for the same comparison. The key pillars on Slide 19 not only support our conservative underwriting and strong credit performance, but also our ability to mitigate losses in periods of stress. I will discuss this more in a moment. Slide 20 offers a general comparison of our lending approach as a relationship based regional bank with more transactional oriented institutions. We have deep market knowledge and bank well known and active investors who are strongly aligned with the need to protect and enhance their property values over time.
Our borrowers tend to be more disciplined and value oriented with respect to project selection. From an underwriting perspective, we generally focus on in place not projected cash flows, which provides an added buffer should NOI growth not materialize. We hope these pages provide some further context for the credit results illustrated on Slides 21 and 22. On 21, you can see the continued stability in our nonaccrual and past due loan buckets. The bottom charts illustrate our allowance for credit loss coverage relative to loans and past due loans. As Ira mentioned, the quarter's increase in allowance was primarily related to quantitative reserves associated with the migration of loans into criticized and classified categories. We remain confident with the performance and potential loss content of these loans.
We are comfortable with the current position of the allowance but acknowledge that further real estate stress and elevated interest rates could move our allowance coverage somewhat beyond 1% during the remainder of 2024. Turning to Slide 22. Net charge offs ticked up during the quarter as a result of $9.5 million charge-off related to taxi medallion loans. Commercial real estate charge offs were de minimis. We present two important analyses at the bottom of this slide. On the bottom left, we compare loss given default ratios on our commercial real estate and construction loans to peers over a variety of timeframes. Loss given default is a calculation of charge offs relative to nonaccrual loans. This analysis suggests that over time our nonaccrual loans were significantly less likely to be charged off than appears given our loss mitigation techniques.
The most important loss mitigation tool that we have in times of stress is typically the deep resources and liquidity of our wealthy borrower base. On the bottom right, we illustrate our reserve relative to implied years of coverage based on certain loss rates. While our allowance coverage is below peers on an absolute basis, we believe that relative to potential loss content we remain consistently better reserved. For example, our current reserve would cover six years of implied loan losses based on the average net charge-off rate between 2001 and 2023. This is double the relative reserve coverage of our peers. We remain confident that we are well positioned for a potential deterioration of credit quality across the industry. Our below peer loss rates relative to total loans and CRE loans specifically are illustrated on Slide 23.
As we have said historically, our loss rates tend to be roughly 40% of peer levels through the cycle. The next slide illustrates the sequential increase in our tangible book value and capital ratios. Tangible book value increased slightly from the fourth quarter of 2023 despite a modest headwind from the OCI impact associated with our available for sale securities portfolio. Regulatory capital ratios have continued to expand. And as Ira mentioned earlier, we anticipate further expansion for the rest of 2024 and beyond. With that, I'll turn the call back to the operator to begin Q&A. Thank you.
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