Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2019 Valley National Bancorp Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Rick Kraemer, Director of Corporate Finance. Sir, please go ahead.

Thank you, Michel. Good morning and welcome to the Valley third quarter 2019 earnings conference call. On the call today is Ira Robbins, President and CEO; Mike Hagedorn, CFO; and Tom Iadanza, CBO. Before we begin, I would like to make everyone aware that you can find our third quarter earnings release and supporting documents on our company website 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 to GAAP results. Additionally, I would like you to direct you to Slide 2 of our 3Q '19 earnings presentation with a reminder 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'd like to turn the call over to Ira Robbins.

Thanks, Rick. Good morning and welcome. Our third quarter results reflect continued progress towards achieving our previously stated goals of consistent growth, greater operating efficiency and stronger contributions from fee generating businesses. Organic loan growth remains impressive totaling 12% on an annualized linked quarter basis, and slightly over 8% year-to-date, consistent with a full year loan growth targets we previously established albeit at the higher end. The growth drivers in the current quarter were well diversified across loan categories as shown on Slide 8 of our earnings presentation. Our efforts to establish ourselves as a leading middle market C&I business lender within our footprint continue to take hold and I'm proud of the substantial progress we continue to make. While the loan growth has had a tendency to overshadow the deposit story, we are seeing some solid trends there as well. For instance, our branch deposits are growing at a rate of almost 5% annualized, with over 25% of that growth coming in Non-interest bearing deposits. This is even more impressive considering that we closed 15 branches in 2019 to-date. As we've mentioned in the prior quarterly calls, we continue to emphasize improving operating leverage, while acknowledging expenses can remain volatile on a quarter-to-quarter basis. Year-to-date 2019 adjusted revenue has increased 3.2% and adjusted expenses declined 4% compared to the same period last year, thus producing positive operating leverage of over 400 basis points on an expanding balance sheet. We remain extremely focused on reallocating resources towards business lines, products and people that give us the greatest returns on our expense base. Non-interest income saw a significant boost from the prior quarter, driven primarily by an $8.5 million increase in swap related fee income. Our active marketing efforts and education among our sales team and clients continue to make this a substantial contributor to the bottom line, once again, consistent with our strategy of enhancing values to middle market presence. Additionally, our mortgage gain on sales business saw a nice rebound from the previous quarter, aided in apart by increases in refinance activity. Looking at Slide 4 and the third quarter highlights, Valley reported GAAP and adjusted earnings per share of $0.24, up 14% from the third quarter of last year. As previously stated, we are encouraged with many of the underlying trends we witnessed during the quarter, such as strong loan growth and continued diversification. Solid branch core deposit growth, both in dollars and unit of accounts, relatively flat core expense trends, and most importantly a Valley sound credit quality metrics. Now like to turn the call over to Mike Hagedorn for some additional financial highlights.

Thank you, Ira. To begin, I'll continue on the topic of the income statement. Turning to Slide 5 and quarterly net interest income and margin trends; as Ira mentioned, our net interest margin declined 5 basis points from the prior quarter to 2.91%. While interest rate spread only declined 4 basis points from the previous period, we experienced higher amortization expense during the quarter, which led to an additional 1 basis point of NIM compression. Though the current environment continues to place pressure on net interest income, we remain encouraged by our forward re-pricing gap as illustrated on the left hand side of Slide 6. We have continued to place more emphasis on the shorter end of the curve on liabilities over the past 18 plus months. This was done in part due to the increasing floating rate nature of our loan portfolio and was accelerated as the Fed was signaling the end of the tightening cycle. Additionally, as you can see from the 12-month forward maturity schedule on Slide 6, there should be substantial ability to re-price both retail CDs and other wholesale borrowings meaningfully lower should the current rate outlook remain. As illustrated on Slide 9, we have already begun to see the efforts of lower re-pricing begin to affect our monthly deposit rate averages. This trend should only become more prevalent in coming quarters. Furthermore, the addition of Oritani's balance sheet should position the combined NAV to a more liability sensitive direction. Moving to assets, we expect the current environment will continue to negatively impact portfolio yields. While approximately 55% of our loans are adjustable rate at the end of the quarter, only 32% of total loans are scheduled to reset within the next 12 months. Approximately 16% of total loans are indexed to one-month LIBOR and…

Thanks Mike. I'd like to give a brief update regarding our announced acquisition of Oritani. Let me start by saying, we are extremely excited and well prepared to welcome the customers and employees of Oritani into Valley. Our planning and outreach have been remarkable and we remain highly confident in the success of this integration. As previously disclosed, Valley has received regulatory approval from the OCC to complete the merger. The merger remains subject to additional regulatory action by the Fed and approval by the shareholders of both Valley and Oritani. We remain hopeful in our ability to close this transaction within the original timeline of the fourth quarter of 2019. When we announced the transaction, we had not included any branch consolidations into the cost save estimate. Subsequent to announcement, we filed a public regulatory application and disclosed our plans to consolidate nine branches upon conversion. These include six Oritani branches and three legacy Valley branches. We plan to give updates on saves associated with these consolidations as we are closer to conversion, most likely in the first or second quarter of 2020. Importantly, we do not expect any of these additional consolidations to impact the timing of the existing 10 closures identified in our stand-alone branch transformation plan, which we discussed last quarter. As we strive to achieve a more relevant retail experience, you should expect the continued rationalization, relocation and improvement of our physical branch network for many years to come. For reference, over the past five years, we have closed 59 branches, while maintaining and improving retention rates on deposits. In closing, this quarter's results demonstrated many of the efforts we have been working toward over the past two years. Valley has a renewed focus on sustainable and responsible growth driven by greater diversification of product and talent. The bank's transformation from manual to more automated processes combined with the streamline delivery systems are creating greater operating efficiencies. The revenue distribution away from net interest income is showing increasing signs of stabilization and growth. I'm extremely proud of all the outcomes and believe over time, these will continue to have a greater positive impact on shareholder return while reinforcing our commitment to community, employees, innovation and acquiring new talent. With that, I'd like to now turn the call back over to Michel to begin Q&A. Thank you.

[Operator Instructions] Our first question comes from the line of Ken Zerbe with Morgan Stanley. Your line is open, please go ahead.

I guess, just starting up with taxi, in terms of the additional provisioning put up against that. Was there to start, I guess, next quarter or the quarter after, if additional taxi loans mature and they're not able to pay back to loans, could we see a repeat of this, we're building additional reserves for those other loans?

Yes. Thanks. This is Tom Iadanza. Thanks for the question. We don't have any significant maturities of the taxi portfolio in the fourth quarter or through 2020. Mindful, that we review values; 85% of our portfolio is on impaired status. But we don't expect this year -- in this past quarter, we had about $14 million that came up for renewal. We don't have that in the fourth quarter or through most of 2020.

And then I guess staying with taxi, I think, a lot of your peers or some of the bigger taxi lenders, I must say, effectively dealt with their taxi exposures. They wrote down to just very low levels. Do you guys feel good about the levels that you're currently holding the taxi loans at and is there -- if we use market values, I guess, where are you marking these loans down to on your books right now?

Yes, okay. We were using a 6-month trailing average of sales. We're marked down to about 212,000 on the New York City, 31,000 on the Chicago. Keep in mind, 67% of our portfolio is on non-accrual status, while only 16% is actually not paying. And there is a group in that 16% that we're in the process of renewing and bringing back to current part of that renewal will be bringing it to current status that will continue to carry on non-accrual. It's less than 1% of our total portfolio. When we do renew, we tend to get more guarantee, sometimes side collateral. We think we're better off just managing as we are at this stage.

And then just one final question. In terms of the swap activity, I understand that this quarter is very strong, and is unlikely to repeat next quarter, but are you doing anything different in that business that is driving the higher amounts or was this just solely driven by interest rates and that should fall back down at some point, back down to more normal levels that we've seen in the past?

I think as you're highlighting, Ken, it's obviously a little bit higher than what it's historically been. But I think it's consistent with their focus we've had on ensuring middle-market lending across the entire organization. We've begun to really train our staff and target and allocate resources toward specific customers as well. So we think this is a concerted effort that we've done internally to really drive the specific business. Obviously, part of it's a function of where interest rates are as well, but this was definitely a strategy internally.

Yes, I just add, this is just really nothing unusual. We do -- most of our business is below 10-year maturity. There is some slightly above that, but it's nothing unusual and it's really across the board within our portfolio in all four of our states.

Thank you. And our next question comes from the line of Frank Schiraldi with Sandler O'Neill. Your line is open. Please go ahead.

Just wanted to start on or focus on the NIM. In terms of -- obviously, you got pretty challenging yield curve as well as, as rates moving lower but, based on your GAAP analysis, it seems like your messaging here is that you can defend the NIM at these levels. Is that the message? And then secondly attached to that, when you guys announced Oritani, you were asked about pro forma NIM and you gave a number of down 3 basis points. Just wondering, if there is any significant change there?

This is Mike. I'm going to reference you back to Slide 6 in my prepared comments that one of the things that will provide a tailwind to value in the coming quarters is just the sheer level of cumulative negative gap that we have as we re-price large portions of our funding sources including core deposits. So I think that's a huge advantage, maybe relative to some other competitors.

And then just on the Oritani part of the question, any change there?

No, nothing to add there.

And then just finally on loan growth, Ira, as you mentioned, you're trending at the high end or slightly above the high end of full year guide, just kind of curious what the -- why we should expect normalization in 4Q to sort of stay in that guide. Is it just seasonal or more than anything else or can you give us any color on your thoughts given what the pipeline looks like here?

Yes. It's Tom, again, Frank. Our growth through the first nine months, when you annualize that, it's just over 8% -- it's 8.2%; third quarter has traditionally been our strongest quarter of production and growth. We have different options of what we can and will do with regards to loan sales and such to our syndication and secondary marketing desks. Our growth again is well diversified. The new production, the average loan size is no different than what we've historically had on the balance sheet at around $3 million loan size for CRE and about $1 million size for C&I. So the focus has really been on relationship driven, not volume driven. And when you look at that deposit growth, and Ira mentioned the 5% on pace for the 5% growth, our business deposits year-to-date grew 6.5%. So when you look at that C&I growth combined with that business deposit growth, that's what's really fueling both ends of that. So I think we're comfortable with the 6% to 8% guidance for the year probably closer to that upper range.

Frank, this is Ira. Being a finance guy, right, you'd love to be able to see something on a linear basis. That's how budget should look and everything else just to make things a lot easier. But Tom and team tell me that there's customers and relationships involved and unfortunately everything doesn't necessarily close at the same time that we anticipate. But we're comfortable with that full-year guidance of 6% to 8% as we attempt to manage profitability versus loan growth as well.

[Operator Instructions] Our next question comes from the line of David Chiaverini with Wedbush Securities. Your line is open. Please go ahead.

Couple of questions for you. So sticking with Slide 6, I just want to make sure I understand the gap analysis. This essentially is representing how much in liabilities or re-pricing in each of the quarters versus how much in assets are being re-priced in those respective quarters, right?

That's correct. That's the dark blue versus the light blue bars.

And then on the right hand side, with the CD rates, do you have an estimation as to how much you expect the CD rates to improve in each of these quarters?

Well, I'll point you back to our overall deposit betas, which in the prior or the past quarter were only 7% and I don't think that's reflective of what has gone on and will go on in the future. Actually, when you go back to June to September, those deposit betas are closer to 21%. So I think as the Fed continues to decrease rates, as we expect, we could see meaningful re-pricing somewhere in the neighborhood of the first and second quarters of 2020 probably around 50 basis points.

And then shifting back to the swap fees, I was curious as to who's taking on the counterparty risk, because I'm assuming that the borrowers are swapping fixed for floating.

Most of this is cleared through the exchanges.

And then the final question for me is on new account openings. You mentioned about how the branch deposits have grown 5% annualized year-to-date. In last quarter, you had a couple of interesting stats about new account openings and so forth. I was curious, any updates if that momentum continued into the third quarter.

Yes. Absolutely, it has. When I talked about the business accounts, we had 65 new account -- 65,00 new accounts opened up, sorry, for the first nine months. On the positive side, Florida, demand deposits were up over 10%, Alabama up over 13%. The biggest increase in deposit and commercial deposit openings and dollars is coming out of the New York market. And on a year-to-year basis, we've had $450 million of deposit growth in our branch system into the New Jersey market. So you're really seeing that very consistent, commercial deposit driven activity and all around what we talked about over the last couple of years building a treasury solutions product, hiring a sales force, matching it with the lenders to make sure we have relationship-driven business going on in all our markets.

That's very helpful and next.

Sorry, David, if I can just add on to what Tom is saying. To me, I look at it over a relative basis from a period of maybe a little bit longer time. But if you look at annualize the new account business growth -- business accounts for this year-to-date, we're up 16% and new accounts on businesses, which is a big number. But when you go back versus two years ago, that's over 50% new business accounts that we're generating in this organization than where we were in 2017, which is a massive testament to this, the shift in culture and shift in strategy within this organization and we think these are going to have positive benefits as we continue to grow the deposit book.

And actually one more clarification question, on the expenses, the year-to-date range on an adjusted basis has been $136 million to $140 million. When you say that the foreseeable future will see expenses in this range, you're referring to the adjusted range, right?

Well, I think we're referring back to first quarter of '19 where you started $147 million -- almost $148 million, through third quarter to almost $146 million. But if you look at the adjusted numbers that number for the first quarter is more or like $136 million and as we stated in our prepared remarks in the third quarter of this year was $140 million. So I think that is probably closer to the range that we are going to experience.

So adjusted should be in the $136 million to $140 million range going forward?

Correct.

Thank you. And our next question comes from the line of Collyn Gilbert with KBW. Your line is open. Please go ahead.

I apologize if you guys covered this, I unfortunately to hop on late, but just in terms of the large swing in the swap fees this quarter. Did you already indicate what was the driver of that?

We talked a little bit about it, but the logic on, it's a focus in turn that we've had on targeting middle market customers, reengaging with our staff to make sure they understand the benefits and having conversations with our relationship customers as to the benefit. Obviously, there is a function of that's attributable to where interest rates are. That said, we're attempting to manage the interest rate risk within our balance sheet as well. So it's a combination of where interest rates are, a combination of the focus we've had on targeting specific customers. And I think more of a testament to the wonderful efforts of our staff.

And in your slide deck, I know you indicated that it's not likely to repeat. Was there any -- I mean, just in terms of that, was it volume driven or was there any one large relationship that was in there? I mean, I'm just trying to quantify when you say not likely to repeat like how.

It was all -- it was all volume very granular, a large number of trades and pretty much spread equally in North and South of our regions.

And then just one last small item, the uptick in the CRE non-accrual that you saw this quarter, was that in the Florida market or New Jersey market?

No, no, no. It was the past due by paying -- it was one relationship at $22 million that was current for all payments, not a credit issue, we were going to process of renewing and we didn't renew until the first week of October. That was removed. There was also a $4 million substandard loan that was moved to non-accrual secured by two pieces of property up here in the New Jersey, market which has value well above our loan amount.

And that was up here…

And that was up here in New Jersey.

Okay. So everything was up here in New Jersey?

Yes.

Got it.

They've been long time customers.

Okay. Very good, I'll leave it there. Thanks guys.

Thanks.

Thank you. And our next question comes from the line of Steven Duong with RBC Capital Markets. Your line is open. Please go ahead.

Apologize. I'm jumping on late as well. So just wanted to follow up on the new business accounts, do you guys have a breakout between the Florida versus the New York metro area?

We do, I don't have it handy. As I mentioned, the majority of the new business accounts on the commercial side are being opened in the New York market, but I don't have that information in front of me with regards to the other. But what the important part is, we are seeing growth in non-interest bearing and in total deposits in each region with Florida and Alabama being above 10% primarily driven by commercial.

That's good to hear you, guys. And then just appreciate your guidance on CECL. How does that affect your 2020 accretion expectations?

So our expectation right now at the levels that I gave you and I want to caveat again at those levels could change between now and the end of the year. We don't expect a material change in the accretion as a result of CECL.

Thank you. And I'm showing no further questions at this time. And I would like to turn the conference back over to Mr. Rick Kraemer for any further remarks.

Thank you all for joining us today. If you need additional information, please reach out to Mike Hagedorn or myself, and we look forward to talking again next quarter. Have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.