Valley National Bancorp (VLY) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Valley National Bank first quarter earnings release.

(Operator Instructions) As a reminder, the call is being recorded.

And I'll turn the call now over to Mr. Rick Kraemer.

Thanks, John.

Good morning, and welcome to the Valley National Bancorp First Quarter 2018 Earnings Conference Call.

Leading our call today will be Valley President and CEO, Ira Robbins; and our Chief Financial Officer, Alan Eskow.

Before we get started, I want to make everyone aware that you can find our first quarter earnings release and supporting documents on our company website, valleynationalbank.com.

Additionally, I would like to point everyone to Slide 2 of our 1Q '18 earnings presentation and remind everyone 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.

And now it's my pleasure to turn the call over to Ira Robbins.

Thank you, Rick.

Good morning, and thank you for joining us this morning.

The first quarter 2018, while noisy from a financial perspective, was tremendously successful as we continued to execute on many of the initiatives necessary to provide future relevance to our franchise, enhance profitability and create the foundation for greater shareholder returns.

Our technology roadmap remains on course as we continue to focus on enhancing the customer experience through new front-end delivery channels, while simultaneously improving the operating efficiency of the entire organization.

During the first 3 months of 2018, we launched a dynamic website through which our customers have access to a modern, digital account opening experience void of traditional pain points.

Additionally, we introduced our new residential mortgage loan origination platform which incorporates an end-to-end paperless process.

Approximately 50% of the originations today are utilizing this technology and we anticipate reaching 100% by the end of the second quarter.

Investments in technologies such as these will help shape the customer experience of Valley and to a greater degree support scalable growth and improved operating efficiency.

Our goal of becoming one of the premier regional banks in the country is not going to be easy nor instantaneous.

There are going to be many obstacles to overcome, some known and many unforeseen.

That said, the foundation we are improving upon today will leave us in a position to capitalize on in the future.

On January 1, 2018, we closed our acquisition of USAmeriBank.

We are excited to have all of our new teammates onboard, including Joe Chillura and Al Rogers, USAB's former CEO and Chief Lending Officer respectively, and look forward to their value contributions.

Our systems integration is on track for mid-May, and we should begin to realize some of our projected cost savings later in the second quarter.

Separately, a major near-term initiative the bank is focusing on is our branch transformation strategy.

This project, largely a follow on to the 29 branches we closed in latter half of 2015 and during 2016, will be revealed through multiple phases over several years, and is an integral part of our future success.

The strategy consists of a comprehensive plan to revitalize, redesign and rethink our entire New Jersey and New York branch network.

This is an all hands on deck effort that will encompass a more dynamic view of real estate we own, and lease and integrate a more thoughtful approach to how we stay relevant to the communities we operate in.

We plan to provide the results of phase 1 coinciding with our second quarter earnings release in late July of this year.

In the first quarter of 2018, Valley posted reported earnings of $0.12 a share.

Included in this number were several infrequent items.

First, we recorded a higher-than-average legal expense of $12.3 million due to a $10.5 million increase in litigation reserves stemming from outstanding legal matters, in addition to higher-than-normal legal fees during the quarter.

Please see our annual 10-K filing for additional disclosures regarding current outstanding litigation.

Secondly, we took an additional $10.7 million of loan loss provision associated with New York City taxi medallions given the combination of the more recent trends in transfer pricing and pressure on cash flows.

On an after-tax basis, the additional provision negatively impacted diluted earnings per share by approximately $0.02.

At quarter-end, our medallion portfolio stood at 0.60% of total loans, with a 15.7% related reserve to total exposure, despite the majority of that portfolio still performing and accruing.

Merger charges and change in control costs related to the USAB transaction and management succession stood at $13.4 million pretax for 1Q 2018.

Additionally, we encountered higher-than-average stock option amortization expense related to several members of management reaching retirement-eligible age or actually retiring.

That number was inflated by $3 million for the quarter.

We also had a few other smaller items that we will cover in the presentation that should be considered infrequent.

Normalizing for all those items, earnings per share would have been substantially higher.

As I stated earlier, it was a noisy quarter.

It's also worth noting during the quarter that our effective tax rate was 23.9%, which included a $2 million charge related to the effect of the USAB acquisition on our state deferred tax assets.

Excluding that charge, our effective rate would have been closer to 20% for the quarter.

Now let us move on to the earnings presentation deck to cover some of the highlights during the first quarter.

Please turn to Slide 3. As I stated earlier, we closed the acquisition of USAB on January 1 and have seen impressive operating results out of our newly acquired partners to date.

Our teams are integrating nicely and the enthusiasm they bring to the bank is infectious.

Loan growth for the quarter was impressive given market headwinds.

Our quarterly annualized organic loan growth expanded 9% during the first quarter.

About half of this came from our Florida markets.

Our operating expenses while clouded by several charges remain in focus and well managed.

After accounting for infrequent items, our core operating expenses were approximately $143 million for the quarter.

Keep in mind, this includes a full quarter of USAB expenses without any cost saves in addition to our mortgage-related commissions.

We believe we remain on target to meet our efficiency ratio goals and previous full year adjusted expense expectations laid out in our fourth quarter 2017 results.

As you can see on Slide 4, Valley continues to diversify both geographically and by product set.

Despite 1Q generally being a seasonally slower quarter for Valley, we posted impressive organic growth, not only for Valley, but relative to industry metrics.

The linked quarter growth did not include wholesale loan purchases or unusual participations, but rather the increase was due to our more diversified geography, renewed sales efforts across all of our markets and utilizing our expanded balance sheet.

Internally, we have adjusted commercial lender incentive compensation plans to more closely align with industry standards, and are actively recruiting seasoned lenders across all of our geographies.

We are encouraged by the level of new loan originations, which exceeded $1.5 billion for the quarter, along with new loan yields that are pointed in the right direction, and will help stabilize the margin in coming years as deposit cost continue to escalate.

We remain comfortable with our previously expressed loan growth targets and are committed to maintaining our historical conservative underwriting standards throughout Valley's entire footprint and asset classes.

Turning to Slide 5, perhaps the biggest headwind we and many banks face is the potential rising cost of deposits.

While Valley possesses an extremely strong deposit composition, we are not immune to the forces of market competition.

Our stand-alone Valley deposit growth of 9.1% was an improvement over recent periods, yet still far from the levels we hope to achieve.

While total deposit betas remain steady for the first quarter, we are anticipating that these levels begin to increase as the year moves on.

This is driven by what appears to be a recent pickup in market pricing, combined with our own success of growing loans and the need to fund that growth.

Having said that, our diversified geographic footprint has given us access to a substantial balance of lower cost and lower beta deposits, which we believe will be a substantial differentiator in quarters and years to come relative to many of our Metro New York peers.

I now like to turn the call over to Alan Eskow to cover some additional financial topics.

Thank you, Ira.

That commentary is a good segue to our overall net interest income and margin discussion on Slide 6. After listening to many requests from the analyst community, you'll notice we reclassified swap fee income from net interest income to non-interest income.

In theory, this should create less volatility to the NIM moving forward.

Consequently, our net interest margin was flat linked quarter.

The margin and net interest income include the acquired loans from USAB, which have a coupon of 4.47%.

However, as a result of our purchase accounting valuations, we [bought] their loans over at a market rate of 4.29%.

As stated in other acquisitions, we do not temporarily inflate net interest income or loan yields through purchase accounting.

Two notable items that had a negative impact to our previous quarter outlook was the timing of the transfer of USAB's Federal Home Loan Bank borrowings from Atlanta to New York, which came with a higher-than-expected cost combined with the impact of loan prepayments and paydowns that were also higher than anticipated and at higher rates.

Also while factored into our previous guidance, it's important to remember the lower date count in the first quarter, which does not reflect the full margin benefit of the USAB acquisition.

Overall, we are pleased with how the margin held up given the moves in market deposit pricing we saw late in the first quarter.

Echoing Ira's earlier comments, we continue to see a steady climb in new origination yields, reaching the 4.4% level for the month of March.

Even though we are anticipating deposit betas of 50%, we believe our floating rate asset should keep pace with any migration in higher funding costs.

We remain focused on defending the margin while growing loans to fuel net interest expansion.

Turning now to Slide 7, we focus on non-interest income.

While the linked quarter growth was attributable to the addition of USAmeriBank, we continue to see our efforts across most business lines deliver consistent performance.

Our residential mortgage originations were $372 million for the first quarter of 2018, compared to $291 million in the prior quarter.

Our shift away from a predominantly refinance-driven market continues to improve with purchase-driven mortgages making up over 65% of originations in the quarter.

This should lead to a less cyclical mortgage origination volume moving forward.

We believe we are on track to meet our previously stated goal of greater than $1.5 billion in originations for the year.

Moving on to Slide 8, you can see we remain on track to meet our previously announced LIFT targets.

As we move through the first year implementation period ending in June -- ending on June 30, 2018, we will have a better sense of our ability to accelerate the remaining expected benefits of LIFT.

Admittedly, our operating expenses during the quarter were filled with a great deal of noises obviously, as Ira previously stated.

In the lower left-hand chart, we hope to simplify the breakdown of operating expenses in an effort to provide you with a better run rate.

In addition to those previously mentioned expenses, we experienced inflated costs related to processing temporary staffing and software of approximately $2 million due to carrying duplicative operating systems through our upcoming conversion.

We believe that third quarter of 2018 will reflect the better representation of what our operating expenses will look like once we begin to realize a more normal run rate of expected cost saves from USAB, which we expect to be approximately $6.5 million per quarter or roughly $26 million on an annualized pre-tax basis.

On Slide 9 we cover some of our key credit quality highlights.

For the third quarter in a row, we were in a net recovery position.

Our levels of non-accrual stayed relatively constant as a percentage of total loans and our absolute levels of non-performing assets migrated marginally higher.

Obviously, our taxi medallion loan portfolio was a drag on our reported first quarter earnings.

Recently, a competitor marked their New York City medallions to a level far below the published market transfer averages.

Those published amounts are a significant component of our fair valuation of taxi medallion loans to help determine our necessary loan loss reserve level.

At March 31, 2018, we estimated the New York City medallion market value to be approximately $270,000.

We believe our underwriting criteria, more conservative than most in conjunction with the fact that almost all our portfolio is performing, continues to help guide our reserve levels as well.

As always, we will monitor the positions closely to reflect any dramatic changes to the market as we did this quarter.

That concludes our formal remarks and we ask the operator to open the line for Q&A.

(Operator Instructions) And first from the line of Frank Schiraldi with Sandler O'Neill.

Just want to start with the strong loan growth in the quarter.

And just given that growth, I wondered if you could talk a little bit about how confident you are, Ira, in hitting your targets of 7% to 9% growth for the year?

And if half coming out of Florida, like we saw in the first quarter, is a reasonable expectation?

I think just starting from where we ended up, first quarter as we mentioned previously is a seasonally light quarter for us based on typical line paydowns, slow activity in the New Jersey, New York market with the auto book as well as some residential historically for us.

So to show the 9% organic growth was a real positive for us, and I think it's a testament to Tom and some of the changes that we made within the entire lending book as to how we go about attracting customers here.

I'm pretty comfortable with where the targets are for the rest of the year and maybe Tom, if you want to talk a little bit about a little bit more guidance on that?

Yes, sure.

Thank you, Ira.

I think what you saw in that first quarter was exactly as it was laid out.

It was organic, it was very diverse every market contributed, every product set contributed.

The half that we attribute coming out of Florida also includes the legacy Valley portion of Florida, which had a relatively strong quarter.

So we -- the positive news is we've seen it on the C&I side, we've seen it on the real estate side, and our pipeline continued to build.

Our pipeline is above where it's been in the past, probably by a good 10%, 15%, not including what USAB has contributed to us.

A lot of it is based on a program we implemented probably 18 months ago, with a more focused sales culture, reallocating resources to have more feet on the street generating business as well as strategic hires in all our marketplaces to bring in experienced people that had a pretty good following of business opportunities.

So we believe we'll hit the guideline of 7% to 9%.

Our April will turn out, looks like it's going to be okay, and we're optimistic that we will reach our budgeted numbers.

Okay.

Then on the branch, you talked about the branch transformation plan that I guess you guys are in the midst of.

And I don't know if you can give any more color there.

Really, I'm just kind of wondering, as you start this thing out -- off, if you're -- are you thinking this is additional potential cost saves or are you just thinking you'll be redeploying expense differently, what is the initial thought there?

I think it's a pretty macro approach as to how we want to address this.

I mean anyone can look at the FDIC data and see what our average branch size is in some of the markets we are in.

And they're probably smaller than where they should be for some of the markets that we operate in.

So how do we go about making sure that we're attracting deposits at an efficient cost is something that's really important to us throughout the entire organization.

What do those branches look like, how inviting are they to customers to come in, so it's a pretty holistic approach as to how we want to go about allocating our capital and allocating our individual resources.

And in July, I think we're excited to provide The Street a little bit more guidance as to what that's going to look like for us.

Okay.

And then just finally, if you could just remind me, what are your ROA targets and just the timing behind those targets?

We had upped ours to about 1.25% after the tax change and that's about 2020.

Our next question is from Ken Zerbe with Morgan Stanley.

I guess first question for Alan, you mentioned that third quarter expenses could be a better indication or more -- or cleaner, I suppose.

Can you give us what that level might be for expenses in 3Q?

And also what does that imply for second quarter expenses?

Well, I don't think -- first of all, a lot of the more infrequent items are going to disappear, we hope, in the second quarter.

We don't expect to see the same kind of large infrequencies that we saw.

So that's number one for the second quarter.

But remember in the second quarter, we still have all of USAB's systems until the conversion is complete.

And then there's the process of reconciling and making sure everything is running properly on Valley's systems.

So I think our guidance is that we expect to see about 30% benefit from USAB's expense base in the second quarter and we'll see a little more of that as we go into the third quarter.

Ken, let me just -- this is Rick, let me just clarify.

So it's going to be 30% of one quarter -- one full quarter in 2Q.

So if we're thinking $6.5 million a quarter in an annual -- in a quarterly run rate, you will get about 30% of that, so call it $2 million in 2Q; and then in 3Q you should, in theory, get the full amount of that as well as in 4Q and then go forward.

We've laid out that $143.1 million kind of base which is Valley ex all the infrequent items.

It includes our mortgage number and then it also includes the full run rate of USAB.

So if you back off that $143 million, maybe just very simplistically, I don't want to give you a third quarter number, but $143 million minus the $6.5 million gets you at least to where we should be in 3Q.

Got it.

Okay, that's perfect.

That's exactly what I needed to know.

And then just another question, just on the CD yields, this is I guess Page 18 of your press release, there was a decline -- obviously an increase in the balances, which I'm assuming is USAB, but a decline in the yields.

Can you just explain that a little bit?

I understand if it's sort of USAB, but every other category looks like it went up not down.

I'm just wondering of the dynamics there?

And I think it's a great question, Ken, and it leads into how excited we are about the geographic diversification we have within our funding footprint.

On an absolute basis, CDs as well as other deposits are much cheaper in the Alabama and Florida footprint.

They aren't as competitive today as what the New Jersey footprint looks like, so the acquisition of USAB and the merger with their deposit franchise definitely drove down some of those costs.

What happens with deposit betas in that market, it will probably move just like every other market, but maybe not to the same degree.

But the absolute cost isn't much lower than what our historical footprint is.

Our next question is from Collyn Gilbert with KBW.

Ira, to follow up on that comment, do you have what the loan-to-deposit ratio is for your New Jersey/New York franchise and then what it is for Florida and Alabama?

We do.

I don't have it in front of me though, Collyn.

We definitely look at it.

It's important for us to make sure that we're self-funding in each individual geography as well as at different asset classes as best that we can.

We'll maybe try to put something in our -- in the next deck.

Yes, we can get you the numbers.

I would just say generally speaking, they're fairly comparable across all regions.

So it's roughly...

For Alabama.

And if you can throw Alabama into Florida inclusive and then yes, they're all pretty much comparable on loan-to-deposit.

Okay.

Okay, and then just in terms of pricing dynamic, Ira, you touched on that from a deposit standpoint, but maybe just getting a little bit more granular as to what the incremental loan yield is coming on at in the Florida market versus what we're seeing in the New Jersey/New York market.

I know it's going to depend on segmentation, but just trying to monetize what the -- how that competitive difference is in your Florida/Alabama market versus what we're seeing up here.

So either if you could give us some pricing dynamics around that or -- and I know Ira you mentioned you think deposit betas are going to be lower, but just trying to get a little bit more quantification of that.

So I mean, historically, we were running around 25 basis points higher in new volume yield on the Florida footprint all else being equal type of loan that we had.

We still see that to be appropriate today and we're modeling that as if that's going to maintain for the rest of the year.

Like I said, I think deposit betas will be a little bit less in the Florida and Alabama footprint.

But I think as Alan mentioned, we're forecasting potentially 50% betas up here in New Jersey based on the competition levels we're seeing.

So obviously, we're going to try to focus as much as we can on having deposit growth coming from the Florida and Alabama footprint.

Okay.

Okay, and then you had indicated that half the loan growth this quarter was from Florida or half the organic growth was from Florida.

Do you have -- do you know what it was on the deposit base, the split between Florida and up here?

I don't -- there was one large movement in a brokered Florida deposit account that had 100% beta that we moved to a wholesale funding.

So it skews the number a little bit, but the growth was pretty equal across ex that.

New Jersey has been a pretty big growth market for us on deposits actually and we've been able to maintain the funding cost there a little bit, but it is getting definitely more competitive than what we've seen in the last couple of quarters.

Okay.

And then just lastly on the mortgage banking outlook, I know you'd given color, indicated 65% of it was purchased this quarter and your origination volumes.

Can you just sort of -- how you're sort of seeing that growth evolve throughout the remainder of the year within mortgage banking?

And I just want to confirm, the mortgage commission expense is part of your $550 million OpEx guide, right?

Yes, so that's inclusive.

And look, I think we're continuing to see a shift from a refinance activity to a purchase mortgage and we're actually entering into that market today.

So I would gather we'll probably see an increase of consideration going towards purchase versus refinance in the next couple quarters.

Our goal here, and let's be clear, is to not have a national mortgage franchise like what you're seeing from the industry trends of some others or backing out from what some others are actually doing.

Our goal here is to really get our fair market share.

If you look at our market share on purchase mortgages for the branches we have, for the customers we have, we didn't have nearly what we should have within our actual footprint.

Our goal is really to acquire that, and we think we can do that economically and provide some real shareholder value there.

Okay.

And then just one last question.

And I haven't run through all the specifics of what you've offered to us yet, but it just seems like that efficiency ratio is going to be trending lower, but then your 2020 goal is 55%.

I mean, 2020 is far away and that 55%, we're not that far off.

I just -- is that a very conservative goal?

What -- I don't know if you could...

Yes, so it was a very conservative goal and we've refreshed it to be 53%.

Maybe we were too conservative in some of the numbers, so I think in the guidance that we put forward today it's 53%.

But I think when you incorporate LIFT, when you incorporate the cost saves that we're going to get from USAB, when you incorporate some of the other technology improvements we have within the organization today and how we think we can grow loans without having that next marginal dollar of expense come in, we think the expense story is going to be a good story for us.

But you're still sticking to 2020 for 53%?

We'll leave it for now and then...

All right.

It's a conservative goal, I'm going to go on record to say that.

The next question is from Matthew Breese with Piper Jaffray.

I really just wanted to hone in on the $550 million expense guidance.

And then the starting point sounds like $143 million this quarter, and I just want to make sure I had the components right.

So does that include the amortization of intangible assets and does that include the amortization of tax credits?

Yes.

So that's an all-in number, we're at $143 million?

Yes.

Okay.

And then as I think about the progression here, we have the conversion in and the clean numbers in 3Q, that's a $6.5 million drop.

By the end of the year, it will be on a run rate basis of less than that $550 million, and that's accurate as well, right?

Yes.

Okay.

And then I just want to make sure, so the branch -- the branch plan, I'm assuming the goal is less of a footprint, less of a square footage and therefore less cost.

Is that accurate?

I think our goal overall is to change the cost of deposits we have today.

I believe it's too high based on the infrastructure we have and we can, in my opinion, drive that down.

So to grow deposits at a more efficient manner is what our goal is across the entire organization.

Right.

But is any of that included in the existing -- the $550 million expense guidance, the 53%?

No.

No.

Is that included in the 1.25% ROA by 2020 guidance?

No.

Okay.

So if there were additional cost saves, that would all be gravy.

Correct.

Okay.

Given what you're seeing on the deposit front and the dynamics of the competitive environment, is margin stability still the outlook?

Yes.

Okay, and then...

I think we guided 3.13% plus or minus 2 basis points.

So I think we're pretty comfortable that the asset sensitivity within the organization -- and we saw a big run-up in new volume yields this quarter, although I think linked quarter we're maybe not going to see the same incremental increase, but it is moving in the right direction.

Okay.

I'm sorry, just going back to the branch strategy again, you noted it could take a multi-year time frame.

Is that like a 5-year plan or a 2-year plan?

Is it overlaid on LIFT?

I think we'll give you -- so LIFT did not include anything with the branches really.

We sort of took it out because we want to make sure we get it right.

We have been in certain markets and done business a certain way for a very long time, and we want to make sure that we maintain deposits and grow deposits in some of these markets and be real thoughtful about how we go about doing that, whether that's laying in a digital piece with what those branches look like, changing the footprint of some of those branches.

We owe it to you to make sure we give you a complete plan as to what that looks like.

So I don't want to go into too much detail, but I think in July we'll provide a little bit more guidance.

Understood.

Okay.

Last question, just what's a good tax rate from here?

I think we gave 20% to 22%.

(Operator Instructions) And next, we go to David Chiaverini with Wedbush Securities.

I had a follow-up on the net interest margin question.

So the expectation is for it to be flattish in the second quarter.

If we looked out further, should we assume that it should remain flat in out quarters as well?

And I was curious as to how many rate increases you guys are expecting this year?

we think that based upon what we're seeing at this point in time, I think Ira pointed out, we have a sufficient amount of floating-rate assets and maturities of -- or turnover of loans that we think will be reinvested at higher rates that'll be able to help offset the increase in deposit costs.

So we think that at this point, we don't see any major move one way or the other in the margin.

And David, this is Rick.

We haven't forecasted -- since we're only giving Q2 guidance, we're going to stick with that Q2 guidance.

But within that, there's only one additional rate hike factored into it.

Got it.

And then a follow-up on the branch transformation initiative.

Have you guys thought about or are willing to put out there what sort of deposit attrition you could expect from that or do you think that your deposit pricing strategy could offset any potential attrition?

In our investor presentation last time we talked about deposit attrition on one of the branches that had -- that actually burned down.

And I think that's probably what our focus is from a guide as to where we think we could be.

There's normal attrition in every single branch.

But hopefully, it's offset by new customers that come in, and we have net growth within those branches.

So the goal is obviously to have as little attrition as possible, but we want to make sure we're still in markets to support the growth of the organization.

Yes, let me just follow up.

So we actually, in our presentation, we showed the attrition related to the '15 and '16 closing as well as that one branch that happened overnight, and we found that it was around 88% capture, right, so 12% attrition.

Keep in mind, our mobile and digital capabilities at that time were relatively limited to what they are now too so we think that'll only help improve that rate.

Great.

And then lastly, I was curious about -- so you put out pretty good -- very good loan growth, organic loan growth in the quarter.

Are you guys -- on the pricing front, is tax reform allowing you to be a bit more competitive on loan pricing?

I don't see that today.

I think it's still a function of the competition of the markets we're in and the type of products we're going after.

Most of our customers are generally desirable customers for many within the -- for many of our competition.

So we need to make sure that we're competitive, but still knowledgeable as to where the market is.

And we don't think the tax has had any impact on it today.

And to the presenters on the call, we have no further questions in queue.

Okay, John.

Well, I'd like to thank you all again for taking part in our first quarter earnings conference call.

If you have any additional questions, please reach out to Alan Eskow or myself.

Have a good day.

Thanks.

Ladies and gentlemen, that does conclude your conference for today.

Thank you for your participation.

You may now disconnect.