Valley National Bancorp (VLY) 2021 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Valley National Bancorp Second Quarter 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

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

Good morning, and welcome to Valley's Second Quarter 2021 Earnings Conference Call. Presenting on behalf of Valley today are President and CEO, Ira Robbins; Chief Financial Officer, Mike Hagedorn; and Chief Banking Officer, Tom Iadanza.

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 Form 8-K, 10-Q and 10-K for a complete discussion of forward-looking statements.

With that, I'll turn the call over to Ira Robbins.

Thank you, Travis. And welcome to those of you listening into the call. This morning, I want to discuss our recently announced acquisition of The Westchester Bank as well as our targeted efforts to capitalize on disruption opportunities in our markets. Mike will then provide additional details on the financial results before opening the call to your questions.

In the second quarter of 2021, we reported net income of $121 million, earnings per share of $0.29 and return on average assets of 1.17%. For the fourth consecutive quarter, this represents the highest level of quarterly earnings in Valley's entire history. On an adjusted basis, return on average assets was 1.23%, reflecting strong net interest margin performance, improved fee income and a stable provision for loan losses.

Looking forward, we expect that additional balance sheet growth and core margin stability will continue to drive strong financial performance and shareholder value over time.

A few weeks ago, we announced the acquisition of The Westchester Bank. We are thrilled with the opportunity to partner with this high-performing commercial bank and look forward to having President and CEO, John Tolomer, lead our combined efforts in the Westchester market. This is a dynamic area with significant household wealth and commercial lending opportunities. Westchester also contributes a strong core funding base and physical delivery presence in this attractive market.

From a financial perspective, we believe the transaction is very well structured. We expect 1% annual earnings accretion and no impact to our pro forma tangible book value or capital ratios. Westchester will be nicely additive to the $425 million of loans that Valley already has in Westchester County. John's team will benefit from Valley's comprehensive product set and robust balance sheet resources. As a result of this combination, we expect that Westchester County and the surrounding market will be a source of meaningful growth for Valley in the future.

While we are excited about this transaction, it will not disrupt our organic growth initiatives or prevent us from considering other strategic opportunities. To that end, I thought it would be helpful to reiterate our M&A priorities and relevant financial thresholds. We remain interested in potential transactions that would accelerate our strategic initiatives around sustainable balance sheet growth, enhanced efficiency and improved revenue diversity. From a financial perspective, we are focused on tangible book value preservation to the degree that an opportunity is strategically compelling, we will be willing to accept a modest tangible book value dilution as long as the earn-back period is short. We are seeing some recent transactions with earn-back periods beyond 3 years, which is likely outside of our comfort zone.

At Valley, we have strong organic growth initiatives underway. And while we have the currency to be competitive, we will not sacrifice on the financial guardrails that we have established. We believe that this discipline is in the best interest of our shareholders and potential partners over the long term. Historically, Valley's balance sheet growth has been well balanced between acquisitive and organic efforts. This balance is likely to continue over time, and we are extremely excited about the organic growth opportunities currently available to us.

During the quarter, we originated a record $2.6 billion of new loans. This was $1 billion higher than the first quarter and resulted in 10.4% annualized growth in non-PPP loans. The value of our diverse business lines and balance sheet remains apparent as this growth was spread across commercial, residential and consumer categories. We continue to see meaningful opportunities in both our Northeast and Southeast geographies. Our recent hiring efforts and proven ability to attract and service new clients positions us well to continue to capitalize on disruption across our entire footprint.

We also have a really exciting and unique story playing out on the funding side of our balance sheet. Over the last few years, we have focused on diversifying and enhancing our core funding base. On a combined basis, our cannabis banking build-out, digital account opening upgrade and ability to cross-sell deposit accounts to new PPP customers have generated nearly $1 billion of new deposits in the last 6 to 9 months.

We recognize that all banks have benefited to a certain degree from surge deposits and excess liquidity in the banking system. But these Valley-specific initiatives and others in the pipeline represent sustainable and scalable future funding sources that reflect our ability to identify and execute on customer acquisition opportunities.

Capitalizing on the loan and deposit opportunities ahead of us will depend on continued investment in talent, technology and new business capabilities. Over the last few years, these investments have been largely funded by expense savings in other areas. That low-hanging fruit has largely been captured, and future investments may result in some incremental expense growth over the next few quarters. As with everything that we do, we will be thoughtful on the investments we make and work hard to find additional offsets in the legacy expense base.

We remain laser focused on generating positive operating leverage over time, and any investment will be aimed at driving stronger revenue growth and long-term financial performance. We are extremely excited about this quarter's performance and the opportunities that remain available to us. Our growth in performance during the quarter reflect the tremendous team and infrastructure that we continue to develop. The future is extremely bright for Valley, and we look forward to continued success alongside our new partners at The Westchester Bank.

With that, I'd like to now turn the call over to Mike Hagedorn for some additional financial highlights.

Thank you, Ira. Turning to Slide 5. You can see that Valley's reported net interest margin increased to 3.18% from 3.14% in the first quarter of 2021. Exclusive of the impact of PPP loans, we estimate that net interest margin would have been 3.07% versus 3.05% in the prior quarter. This improvement reflects meaningful funding cost reductions, partially offset by the drag associated with carrying a higher cash balance.

Much of the quarter's loan growth occurred in June and will more meaningfully impact third quarter results. We continue to actively manage the funding side of the balance sheet and drove another 9 basis point reduction in our interest-bearing liability costs during the quarter. Interest-bearing deposit costs continued to decline due to a significant reduction in time deposit costs and balances. We also benefited from continued growth in noninterest-bearing deposits.

During the quarter, we issued $300 million of subordinated debt at a cost of 3%. We also redeemed $60 million of legacy subordinated debt at a cost of 6.25% and prepaid nearly $250 million of FHLB advances at an effective average cost of 1.82%. In the aggregate, these redemptions will almost entirely absorb the annual interest expense of the new subordinated debt.

Despite significant loan origination activity and our efforts to reduce borrowings and wholesale funding, our cash balances continued to increase during the quarter, putting modest downward pressure on our margin. We will remain vigilant and look for opportunities to put cash to work but recognize that we are likely to continue to hold more liquidity than in the past. You can see more detail regarding the impact of PPP income on Slide 6.

We estimate that PPP contributed 11 basis points to the margin versus 9 basis points in the first quarter. As of June, we had forgiven $1.8 billion of PPP loans, representing over 75% of our Round 1 and 2 originations. We expect that the pace of forgiveness will slow somewhat in the third quarter and beyond.

Slide 7 outlines our interest rate positioning and the remaining opportunity to reprice liabilities over the next 4 quarters. Of note, we have $1.2 billion of borrowings at a cost of 1.38% set to mature in the third quarter. While we have capitalized on the majority of the funding improvement opportunities in our CD and brokered deposit portfolios, we continue to grind our nonmaturity deposit costs lower. As a result of active balance sheet management and significant deposit growth, our net interest margin has been extremely resilient over the last few years. Despite the challenging interest rate backdrop, we expect to preserve a net interest margin in the range of at least 3% to 3.05%, give or take, for the remainder of the year, excluding the impact of PPP.

Slide 8 illustrates the ongoing improvement in our funding profile. Total deposits increased another 2% during the quarter, fueled by a 5% increase in noninterest-bearing balances and a 7% increase in other transaction balances. Continuing our recent experience, CD balances declined 21% in the quarter. Noninterest and interest-bearing transaction accounts now comprise 32% and 55% of total deposits effectively. These dynamics contributed to the sequential 7 basis point reduction in deposit costs in the second quarter. As Ira mentioned, our recent growth in low-cost core deposits is partially attributable to our unique funding niches, specifically in the cannabis and digital areas. We have also had success cross-selling deposit products to commercial customers, including those newly-acquired through PPP. As these efforts continue to accelerate, we will monitor opportunities to further enhance the efficiency of our physical delivery channels.

Slide 9 details our loan balances and origination trends over the last few quarters. The strong lending pipeline that we described last quarter resulted in $2.6 billion of loan originations during the second quarter. This represents a $1 billion sequential increase in origination activity or a 60% increase from the first quarter. As Ira mentioned, this growth was well balanced between our consumer and commercial categories and across geographies. Roughly 1/3 of the growth was in residential and consumer with the remaining 2/3 split relatively evenly between Northeast and Southeast commercial categories.

We continue to prove our ability to attract and service customers across our geographies. We did not sacrifice underwriting from a credit perspective as both commercial and residential originations remain in line with our history from an LTV and FICO perspective. On a year-to-date basis, we have achieved 7% annualized non-PPP loan growth. We believe we are positioned to achieve the higher end of the mid-single-digit range that we guided to coming into the year.

Moving to Slide 10. We generated noninterest income of $43 million for the quarter, up nearly 38% sequentially. The increase was broad-based, reflecting a rebound in residential mortgage gain on sale income and higher income from both swaps and insurance commissions. Fee income increased to 12.5% of total revenue during the quarter, up from 9.6% in the first quarter. We continue to explore diverse fee opportunities that would contribute to greater revenue diversity and noninterest income consistency.

On Slide 11, you can see that our adjusted expenses increased by approximately 2% to $160 million. Roughly 2/3 of the sequential increase was for higher cash incentive compensation accruals. As we have consistently stated, we are focused on driving sustainable positive operating leverage. During the quarter, our 6% adjusted revenue growth outpaced adjusted expense growth by more than 3x. This drove our adjusted efficiency ratio down to 46.6% from 48.6% in the first quarter.

While we are proud of the efficiency gains that we have achieved over the last few years, we are not satisfied. As Ira mentioned, ongoing disruption in our markets continues to create unique growth opportunities for our organization. Our efforts to capitalize on these opportunities may lead us to selectively invest in additional revenue-generating talent, technology and business capabilities. These thoughtful efforts may result in somewhat higher expenses in the near term but should support meaningfully higher revenue over time, which will result in further positive operating leverage.

Turning to Slide 12, you can see our credit trends for the last 5 quarters. Our allowance for credit losses declined to 1.14% of non-PPP loans from 1.17% in the first quarter. This was the result of significant loan growth that we achieved during the quarter. From a CECL model perspective, due to the improved economic outlook in our markets, we replaced the 10% weight on Moody's prolonged slump scenario with a 10% weight on the upside scenario. We will continue to review these weightings on a quarterly basis.

Our nonaccrual loan balances ticked up to 68 basis points from 62 basis points in the prior quarter. This increase was largely driven by a single construction loan. We have allocated a specific allowance of $3 million to this relationship. Early stage accruing past due loans also ticked up during the quarter but remained below 2020 levels. During the quarter, our active COVID-related deferrals declined to $142 million or just 0.4% of total loans versus 0.9% in the first quarter. Additional detail on our deferrals can be found in the appendix.

As we have reiterated throughout the crisis, Valley's historical credit strength remains a distinguishing characteristic of our organization. As a result, we are confident in our existing reserve and expect to outperform the industry on credit loss experience in any economic environment.

Slide 13 illustrates the consistent growth in our tangible book value and the continued improvement in our capital ratios. Tangible book value has increased 9% in the last 12 months driven by our strong earnings performance. Our tangible common equity to tangible asset ratio increased to 7.73% from 7.55% in the first quarter. Adjusting for our $1.4 billion of PPP loans, tangible common equity would have been above 8% as of June 30.

Our total capital ratio also increased significantly during the quarter as a result of our very successful subordinated debt issuance. We continue to believe that our earnings power will provide the capital necessary to support our organic growth initiatives.

With that, I'll turn the call back over to Ira for some closing commentary.

Thanks, Mike. We are extremely proud of the strong growth and financial performance achieved this quarter. Our net interest margin has been extremely resilient, reflecting our active balance sheet management and loan and deposit tailwinds. We continue to identify unique opportunities for growth and remain focused on driving positive operating leverage. Valley's future is extremely bright, and we are committed to remaining a high-performing institution for the benefit of all of our stakeholders.

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

(Operator Instructions) And our first question coming from the line of Frank Schiraldi from Piper Sandler.

Just wondered if you could talk a little bit about the recent lending hires, particularly down in Florida. Are those teams still ramping up? And did you add anyone in the quarter?

Frank, it's Tom Iadanza. Yes, we continue to add where we think we're going to get revenue enhancement. We added 14 in total in Florida over the last, I'll say, 6 to 9 months, 8 in New York, New Jersey. We onboarded 3 during the second quarter. We have offers out for a few more. We are starting to experience the benefits of their pipeline builds and their pull forward into loans, deposits and relationships for the bank. But as you know, it usually takes 6 to 9 months to build the pipeline to start onboarding, but we're starting to see the benefits of that already.

Okay. Great. And then, Ira, you mentioned laser focused on positive operating leverage. You also mentioned the higher expenses due to investments in the near term. Just wondering maybe if you could -- it sounded to me like maybe the efficiency ratio could tick up then in the near term? And just wondered if you could maybe give your thoughts there or any governors around that over the next couple of quarters?

Frank, I think when we look at our adjusted efficiency ratio, obviously, the current number is impacted because of PPP as well. But we have, as you mentioned, done a lot over the last few years to try to rightsize the organization based on an appropriate foundation to really grow. We think we've, as we said during our earlier comments, really gotten to a point where maybe there's a bit more focus within the organization on revenue enhancement and putting the appropriate infrastructure in place to really leverage that to a greater degree. Mike, can you give a bit more commentary?

Yes. Frank, this is Mike. The revenue lags as you all know, sometimes the people investments, and as Tom said, we've made some of those. And in our prepared remarks, you heard some comments around some other hires as well that are not just in the revenue producing part of the business. So what I would say at this point is our past run rate the last several quarters was around $157 million. I think our adjusted expenses this quarter of $160 million are more indicative of what the go-forward run rate would be.

Just to put it in some kind of context, Frank, when you think about growth within the organization, it's not just on the revenue side from some of the new hires that Tom referenced earlier, but it's also on the technology side and how we think about the dollar of investment on the technology, what the benefit from an automation perspective is going to look like down the road.

On average, we spent about 52% of our technology dollars on running the bank, compared to about 68% according to Gartner, where most banks are. So there's a lot of investment we have internally going into improve and transform value from a customer experience perspective as well as we think from a benefit overall on the efficiency side. So the dollars that we're spending are both on the revenue side and on the operating side on that expense side to really prove out future operating efficiencies.

Okay. I just want to make sure I understand though. Now I'm not so sure in terms of the efficiency ratio. Is it -- the messaging is then that it might kind of hover around here in the near term? Or could it tick up in the near term? Any color on that?

I mean when you back out PPP, it's going to tick up, right? So let's just do the math right there. You're going to have an uptick just overall based on that. There will be some additional investments that are going to come that we think will provide some positive operating leverage as we continue to move forward, and the revenues are going to follow that. And that being said, as Tom referenced, we hired 14 people on the revenue side about 6 to 9 months ago. We should begin to see some benefit from them starting in the next quarter as well, and that will mitigate some of the additional expenses that we're describing.

Our next question coming from the line of Steven Alexopoulos with JPMorgan.

Just to start on the loan side. I know you guys said last quarter, the loan pipeline was strong heading into this quarter, but the $2.6 billion was a really great result. Can you talk about the competitive landscape that you saw as you were booking those originations? And do you think you can sustain that level of originations here?

Sure. Steven, it's Tom Iadanza. Our pipeline on the commercial side remains strong. We're about $2.6 billion, with half that being loans that we've approved in stages of documentation to close. That level, that 1.3 level is in line with what we reported at March 31. So that piece of the pipeline, despite active closings, especially in June of this year, is building and that segment of closing is at the same levels as we had in the last quarter. We are seeing a slowdown on the consumer side, especially in auto and on some of the refinance activity on the resi side. The expectations that 7 -- slightly over 7% annualized for the first 6 months. We think that number will hold up in the second half of the year.

What about the competitive environment, Tom? Can you comment on that, particularly, I'm curious Northeast versus Southeast?

Sure. Sure. It's -- as you know, there is some disruption from other acquisitions, merger activity in both markets. We're benefiting from that through the attraction of people as well as customers. We are actively onboarding those customers we assisted with PPP. We're building loan pipeline and loan portfolio and deposit from that. We have -- what we instituted years back was a very focused customer solicitation program, identifying what a core customer is of Valley's, identifying programs and processes to onboard them, cross-selling them and then rewarding our people based on that performance. That's not new that we've been doing that. That has reap benefits for us and created consistency. The Northeast has been very steady growth for us, though we're getting faster growth in the Southeast. But the competitive landscape is active. It's fair. It's not just banks, but we are getting our fair share.

Okay. That's helpful. And Ira, following up, I think you called out $1 billion of deposits tied from various initiatives, which included the cannabis business. Could you give us an update on cannabis and maybe what portion of those deposits are in that business now?

So at this point, it's about 1/3 of those deposits are coming from the cannabis sector. I think we've been very focused on that, Steve, making sure that we have the right risk appetite, day 1. We spent about 18 months devising our internal approach as to how we want to go about it to make sure it was consistent with the risk appetite of Valley. We have targeted the large multistate operators as we think they provide the appropriate risk for us as we look at who we want to partner with here. And there's a real opportunity there. We are banking Tier 1 customers in New Jersey, Pennsylvania, Ohio, Florida and Illinois at this point.

Okay. That's helpful. And then finally, we're just following up on your prepared comments where you ran through M&A priorities, which I don't recall you doing before. Are you signaling that you're maybe more actively pursuing additional M&A here? And we've seen quite a few larger deals from your peers. How are you thinking about a larger deal here?

Yes. Look, I probably may be a bit more formal today as to some of the financial guardrails, but definitely internally and in other conversations, this is sort of, I think, the guardrails that we're pretty comfortable with. I think probably today, we're maybe a bit more focused on targets that could accelerate some of the revenue growth or revenue diversification versus straight-up expense opportunities that may have shifted a little bit from where we were maybe a couple of quarters or even a few years ago.

We do think there's a significant amount of disruption in the marketplace today. And as a result of that, there's real opportunity for us to look at leveraging revenue growth within our footprint as well as individual asset classes. And we're really excited about that. That said, some of the deals that I've seen where you have 3 years of tangible book value earn back, just seem excessive to me.

Okay. And what about you guys pursuing a larger deal here?

Larger than the Bank of Westchester, probably?

Yes. Well, even MOE, right? I mean some of the deals we've seen have been MOE-like.

I think the MO has to really make sense. I'm really excited as is our team about the organic initiatives we have here. I think a lot of them are really beginning to come to fruition. And if we were to do an MOE or something of significant size, it has to make real strategic sense for us from the revenue expansion perspective. And if it doesn't, we're very comfortable with just going down the path that we're going. We think we're generating at this point, well above peer returns and we think we have a path to continue that and really accelerate it.

So by no means that we feel any kind of pressure, by any means that we need to start looking at an MOE because there's technology gaps that we have because there's market gaps that we have, because there's talent gaps that we have. Quite the contrary, I think our organic opportunities are probably much better than what our peers are. And there's absolutely 0 pressure on our end to do anything of an MOE based on being backed into a corner by say.

Our next question coming from the line of Michael Perito with KBW.

I wanted to just start clarifying, Mike, just I want to make sure I heard you right on the NIM. So you're saying that the core or adjusted NIM will be between 3% and 3.05% for the balance of the year here. And then PPP will be either on top of that or a detriment to that depending on the pace of forgiveness?

Yes. So it will be on top of that. So that's the core. Let's just use the second quarter numbers. 3.18% was the reported result. Ex-PPP, it's 3.07%. And as a reminder, the $2 billion we had in excess cash roughly weighed on NIM, another 2 basis points. So as we think about NIM compression going forward, PPP forgiveness, both volume and absolute impact trailing off as we get more and more of those balances off the balance sheet, we think that the core NIM stability that we're shooting for is between 3% and 3.05%. I would say that the most recent quarter coming up biased would be towards the higher end of that.

Right. I was going to say, I mean, if the growth is where you guys are suggesting it should be that, that would make sense. And then on the fee side, I believe you guys had close to, if not, your highest quarter you've had on kind of the trust and investment side. And then the biggest quarter you've had on the insurance commission side in 1.5 years maybe. Just curious if you guys can comment on some of the trends there and maybe what we should be expecting near term on fee growth?

Yes. Michael, it's Tom Iadanza. On the insurance side, a lot of that is coming through our title company and an improvement in our general insurance agency that we operate. The title business will continue to grow, maybe not at the same pace, relative to the growth in the refinance and the residential market for us as well as they do a lot of commercial business. So we expect that to be steady. It may not grow at the same pace it's grown in the last quarter. And I think overall, our fees on the wealth, trust and insurance business should be flat to slightly up.

Helpful. And then just last question for me. I saw a couple of articles that had linked you guys to the condo that collapsed on South Florida. Just curious if you guys could comment on whether there was any lending or depository relationship there? And maybe just give us a refresher on kind of how you underwrite those types of relationships in that marketplace, that would be great.

Yes, sure. There are -- we had no loans outstanding on that property. The general portfolio that we have on the HOAs relative to our size is small, it's about $250 million of outstandings. The waterfront high-rise is $7 million of outstanding less than $25 million in commitments. Our portfolio is primarily inland, around golf communities, single-family and townhouse. From a depository, the portfolio generates $800 million in deposits. And as I said before, $250 million or less -- slightly less than in loans, our average loan in our portfolio is $425,000.

Really helpful. And obviously, not a huge number, but just in terms of the underwriting process of those types of buildings, is there some type of like property condition assessment that's a part of your process there? Or I apologize, probably a pretty simplistic question, but any additional color would be helpful.

No, absolutely. And another reference is, following Hurricane Andrew, back in the '90s, the requirements for building and safety in the buildings was enhanced. And the bulk of our loans, if not most of our loans, were done -- where buildings that were done after those product improvements and process improvements. From an underwriting standpoint, we have an in-house engineer that reviews all of the advances on any of any construction or improvement parts of the loan that we may have and we have third parties who'll also review.

Very helpful. So I guess at this point, safe to say that you guys feel while small and relative size, still feel pretty decent about that portfolio and the properties that are within it?

Yes. And again, keep in mind, it's primarily townhouse and single-family homes, inland, and it's a deposit business primarily for us. We lead with deposits in that business.

Our next question coming from the line of Steven Duong with RBC Capital.

Ira, just your Westchester Bank acquisition, I assume you've been in discussions in different markets. Can you share with us your Florida market save versus your Metro New York market. How are they different in terms of maybe activity and opportunities?

Yes, Steven, this is Travis Lan, I just thought I'd step in and try and respond, and then Ira can clean up what I missed. But the issue with us, look, we'd love to do an acquisition in Florida, I think. But that market, there's not as many targets and the targets that exist are highly valued, I would say, and make the economics a little bit more challenging. And I think that's why you saw us go out on the -- more of a hiring push earlier this year because we identified the fact that it was unlikely that we would do an acquisition in Florida in the near term. So organic growth opportunities were more significant, and that's where we focused our efforts.

There's more opportunities up in the Northeast, but we look kind of as you can tell with Westchester across the size spectrum. As Ira said, we're focused on strategic opportunities to grow revenues, and Westchester is a very high-performing bank despite its size. And you can look at the earnings accretion and say 1% is immaterial. But what that doesn't capture is the opportunity for us to provide them products they don't have today and to accelerate their growth with our capital and balance sheet resources. So I think that's part of why it was so compelling. I don't know, Ira?

Nothing else to say to that, Travis.

Great. And then just moving on to the loan growth, I mean, really a great quarter all around. A lot of the growth came from your CRE portfolio. Can you just give us some color on -- was that primarily in Florida and any specific type of CRE?

Sure. It was well balanced across the regions. Florida represented about 40% of our production and 55% of our growth. More importantly, it was distributed evenly in product types between apartment, industrial, some retail to essential type of properties. Average loan size was in line with our previous performance, $4.5 million was the average loan size, weighted average loan-to-value was 53%, and debt service average was over 1.5x. Very equally balanced between New York, New Jersey, Florida and Alabama.

That's great to hear, Tom. I guess you mentioned that the 7% year-to-date in the beginning, it looks like you feel comfortable that you may be in that range for the second half of the year. Do you expect a similar performance with CRE as well?

I would expect CRE will be the -- still the larger generator. The C&I business, we're a little hamstrung in that through our line utilization. Companies are not borrowing for anything they're paying down. Our average utilization went from 41% to 38% quarter-to-quarter. So we're still producing C&I business, slight uptick, but it's a little bit harder of a road.

Understood and I appreciate the color, and congrats on the good quarter.

The other thing to add is that we also continue to exit nonrelationship, low-yielding business. And we had about $175 million of that repaid in the second quarter and $300 million year-to-date, primarily assets obtained through the Oritani purchase and New York City multifamily type. So we'll continue to do that and still experience the growth that we're suggesting.

Our next question coming from the line of Matthew Breese with Stephens Inc.

I'd like to drill down into expenses a bit more. So Mike, you mentioned that the $160 million of operating expenses is more indicative of where we're going. But I get the sense from Ira's commentary that the $160 million is really a starting point where we could see some growth. So my question is, what do you expect to add on top of the $160 million? What is the anticipated growth from here? Or am I -- do I get my read wrong?

I don't think you have the read wrong. As you look, now I'm talking about a multiyear look at. I'm not talking about next quarter. So on a multiyear look out -- especially some of the technology investments, not so much the software and the related depreciation. But the people that we're bringing on board to accomplish the technology build-out over time are going to drive expenses higher over time, it's inevitable.

But I want to point you back to what Ira and I both said to the prior question around it, those investments are being made. While you may not get that one-to-one relationship when you actually see the financial benefit of it, those investments are being made so that we can be a more efficient entity in the future. We can service customers differently and faster. We can release some of the redundancies in our processes and streamline our workflow. Those benefits show up after those technology projects are put in place. And I want to be clear about this. I'm talking about a multiyear kind of view forward.

Yes. And maybe, Matt, maybe I'll just add to that. This is not a First Niagara by any means as to how you think about when we think about expenses here. When -- 3 or 4 years ago, when we first started talking about some of the initiatives we were going to do from a strategic perspective, we talked about an incremental $48 million of technology spend. As you can see, we were able to really layer in that $48 million, and we still drop the efficiency ratio across the entire organization. Every single dollar we spend here has to be justified, has to make sure that there is an appropriate return on it or we're not doing it. We're not just spending money on technology for what we think is going to be revenue enhancements, but what we think will be franchise building opportunities, and they're going to be in line and appropriate with the appropriate revenue growth and earnings per share growth that we have, it's not going to outpace it.

And this is Travis, Matt. Just from a modeling perspective, right, so we were $160 million of adjusted expenses this quarter, but that included $2 million of what I would call higher, abnormally high kind of cash incentive accruals. So when you take that out, you kind of add some -- a little bit of the expense growth that we're talking about, it gets you to that $160 million. And that's kind of what's -- what we're contemplating at this point, which is why I think Mike said that $160 million run rate was a good one.

Okay. Next question for me is just could you talk a little bit about the loan portfolio's exposure to floating rates? How much is there? And then how much is subject or below floors where if we do get a Fed hike, we're not going to see the benefit?

Yes. So this is Mike. I'll take a stab at it, and I'm sure Tom will join on the end. Within the entire loan book, roughly 60% of our loans, $18 billion are adjustable. And of that $18 billion, $12 billion or so are tied to LIBOR or Prime and they reprice on a regular basis. So -- and to your point is -- I think what you're getting at is do we have the ability to have repricing take place. And at 60%, I think we do other biases towards that, but it's a balanced portfolio.

Okay. I did want to talk a little bit about Valley Direct, the digital bank. Can you give us a sense for the use case here, the capabilities? And the reason I ask is, obviously, the world is increasingly using mobile devices and all things digital. But during the up interest rate cycle, my gut was that the digital bank offerings from regional bank peers tended to be strictly deposit gathering and came with higher deposit betas. So perhaps, you could give us just a quick pitch on Valley Direct's aim? And how it will be different and ultimately value enhancing?

Yes. I think we just reported on this in the first quarter. Valley Direct is really opportunity to revamp our online account opening process. We don't need it today for deposit gathering. We're not really using it for that benefit. We're using it primarily to improve the process, create efficiencies, roll out this account opening process online in each of our branches, developing those efficiencies there. We have seen traffic slow in the branches. We have seen our online and mobile utilization increase, 15% and 25%, respectively, from last year. And we'll continue to use that Valley Direct as an efficiency for onboarding new accounts into our system.

Really, just following up on that point. It is not, as you're describing, something we're just looking at from a deposit perspective. It has an opportunity from a platform perspective to be how we think about opening accounts across a multi-spectrum of different structures, whether it be on the deposit side and on the loan side. We had the ability to really build a lot of this in-house, which was important to us. It gives us the flexibility to make sure that the customer experience is something that we own, not what a third-party owns. And I think that's part of the focus as we move forward. We need to own our customer experience as we need to own our employee experiences, and a lot of that is driving what the technology initiatives are across the organization.

But if you were to go on to Valley Direct today, you would find an experience, I think, many would really enjoy, 3 minutes, plus or minus, to open up an account and onboard it as well here, which is something that we think is leading and will helpfully drive a multitude of efficiencies across the entire organization.

Okay. Last one for me is on the allowance. You mentioned in the release that there was increases in the allowance across most of your loan categories, including commercial real estate of 5 basis points due to higher quantitative reserves. Could you just flesh it out a little bit more what happened there? And are you preparing for any sort of increase or change in the level of charge-offs?

So within the model, the most sensitive attribute would be the loss rates, and those did not materially change. So the biggest change from a dollar perspective was the fact that we had significant loan growth. When you combine that with an improving economic scenario that I talked about in my prepared remarks from Moody's, you get a slightly lower required allowance, and that's why you see the minor 3 basis point tick down in our allowance coverage ratio.

I'm showing no further questions. I would now like to turn the call back over to Ira Robbins for any closing remarks.

Thank you very much, and we look forward to speaking to you next quarter.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.