Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2019 Valley National Bancorp Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Rick Kraemer. Thank you. Please go ahead, sir.

Thank you, Skyler. Good morning, and welcome to the Valley fourth quarter 2019 earnings conference call. On the call today is Valley 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 you can find our fourth 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 to direct you to Slide 2 of our 4Q 2019 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'll turn the call over to Ira Robbins.

Thank you, Rick. Good morning and welcome. Our fourth quarter results are a reflection of the tremendous progress we've achieved over the past couple of years. We continue to make significant strides towards delivering on and repeating our previously stated goals of: consistent growth, improved operating efficiency and greater diversification of revenue. In the fourth quarter of 2019, Valley reported adjusted earnings per share of $0.24. Our adjusted EPS was up 14% from the fourth quarter of last year. Furthermore, our full year 2019 adjusted EPS of $0.92 was also up 14% versus the full year of 2018. Keep in mind, we delivered these results in a challenging macroeconomic environment, which has put pressure on net interest margins for the entire industry. Equally impressive, we delivered 12.7% tangible book value growth for the full year, while announcing and closing a significant acquisition. Additionally, this growth occurred while paying a meaningful cash dividend and reinvesting in our products, people and infrastructure. Two years ago, we identified several key targets and guidelines for you to hold us accountable. As you have observed, substantial progress has been made on each and every one of those guidelines and targets. Our loan growth has consistently been above industry average, while maintaining the same prudent underwriting standards, which have long been a hallmark of Valley. We have driven down our core costs, beating our estimated adjusted efficiency ratio goals for the full year of 2019. Our multiyear branch transformation initiative has resulted in consolidations and cost saves, while delivering a better product to our customers, which can be seen in many underlying deposit trends. And just as important, Valley's customer experience scores throughout our branch network have exponentially expanded as well. Our fee income continues to grow, boosted by improvement of existing businesses and expansion of new products. Lastly, shareholder value creation is our top priority, and we delivered an exceptional deal with Oritani, which was immediately accretive to tangible book value in all of our capital ratios. Additionally, we remain very encouraged with the many trends we witnessed during the fourth quarter such as: strong organic loan growth with significant geographic and product diversification; excellent business and retail core deposit growth; continued improvement in efficiency; and very sound credit metrics. I'm extremely proud of the progress we have made over the past two years and believe this is only the beginning of a long run of success for Valley. Now I'd like to turn the call over to Mike Hagedorn for some additional financial highlights for the quarter.

Thank you, Ira. Turning to Slide 5 and quarterly net interest income and margin trends. Our net interest margin increased five basis points to 2.96% from the prior quarter, while the interest rate spread increased 10 basis points from the previous period. We are encouraged by this linked-quarter expansion, given the remaining repricing tailwind we believe exists in our current liability structure. We had previously outlined this opportunity in our forward repricing gap during the third quarter call. Accordingly, we have been focused on managing liability costs lower, while maintaining competitively in the market. Furthering our efforts to lower the cost of funds was the extinguishment of approximately $635 million of longer-term FHLB debt during the fourth quarter. We had originally cited the intention to extinguish this debt in conjunction with the closing of the Oritani transaction. This action resulted in an approximate $23 million after-tax charge, and is expected to result in approximately 200 basis points of annual interest expense savings on a comparable level of borrowings, a significant portion of which we have captured in recent weeks. While we continue to place emphasis on the short end of the curve on liabilities, we did take the opportunity to extend duration modestly during the fourth quarter by moving approximately $300 million out between two and three-year durations, utilizing alternative wholesale funds. We believe this action is prudent given the absolute rate available and current shape of the curve. As you can see from the 12-month forward maturity schedule on Slide 6 of our EPS presentation, there's still substantial ability to reprice both retail CDs and other wholesale borrowings meaningfully lower, should the current rate outlook remain. As illustrated on Slide 9, we continue to see the effects of lower repricing on our monthly deposit rate averages. As such, we…

Thanks, Mike. I'd like to provide a brief update on the Oritani merger. After receiving regulatory approval in record time for Valley, we were very pleased to close the transaction in early December. We look forward to the many benefits this transaction will provide, including new customers, deeper penetration into valuable affluent markets and additional capital to fuel future growth. We are planning integration later in the first quarter and should begin to deliver on additional cost saves shortly thereafter. I'm extremely happy with the progress made to-date, and want to thank all Valley and former Oritani employees that made this deal so special and successful. In closing, 2019 was an important year for Valley. Many of the themes that we've laid out to you for the past two years are progressing and the financial results and momentum are illustrative of these efforts. We have been able to deliver on significant goals we laid out, which include: sustainable balance sheet growth that is underwritten with our consistent and conservative approach; greater efficiency, positive operating leverage, driven by a cultural shift within the entire organization; thirdly, strategic balance sheet management with a focus on building capital and allocating it more effectively; and lastly, a disciplined acquisition strategy aimed at creating shareholder value in the short and long term. All of this has occurred while making significant reinvestment in our infrastructure to support a reinvigorated Valley for years to come. The bank’s transformation continues, and I remain absolutely confident and energized by the progress made so far. I believe these changes should have a positive impact on shareholder returns over the long-term, while reinforcing our commitment to community, employees and innovation. With that, I’d like to now turn the call back over to the operator to begin Q&A. Thank you.

[Operator Instructions] We have a question from Ken Zerbe with Morgan Stanley. Your line is now open.

Great, thanks. Good morning, guys. I guess, maybe just starting off, in terms of the loan sale this quarter, I just want to make sure I got all the pieces here. Specifically, the question is, what was the gain that you made on that sale? And the reason I ask is because, if you look at sort of – if – well, we know that the loans are yielding around 3.4%, you’re saving 3.9%. So that’s maybe 50 basis points per year, about $3 million of savings, but it costs you $32 million to get out of this debt. So there must be some very large gain to make this economically make sense for you guys.

Hey, Ken. It’s Tom Iadanza. I can’t comment on the terms of the loan sale. All I will tell you is that we believe that it was prudent to exit or lower our exposure in New York City multifamily portfolio. There were no credit issues within this portfolio of loans we sold actually was performing fairly well with a 63% loan-to-value and a 1.7 times debt service coverage, similar to the loans we have. They don’t – they didn’t fit into our relationship banking, return-to-deposit strategy that we have within the bank. They’re capital-intensive with lower relative yield, with minimal cross-sell and deposit opportunity, and we’ll always assess our capital needs and our asset businesses to make sure that they all fit or we’ll seek better opportunities. So again, I just want to stress, there were no credit issues with it. It was a sound portfolio. It was an opportunity to get out of lower-yielding assets in a class that we thought it was prudent to reduce.

And Ken, this is Ira. I think in our mind, there are really two separate transactions: the FHLB transaction that we described when it came to prepaying, the debt was consistent with what we disclosed when we were announcing the Oritani transaction. So basically, what we did is we took a little bit of the excess capital that was generated through the Oritani deal, used that to pay down debt that took a prepayment charge. So we still had a positive capital position that resulted from Oritani, and this created positive EPS as we begin to move forward. So the loan sale really was a distinct decision differentiator from the gain – or differentiate from what we did on the borrowings. So I really wouldn’t look at them as connected at all.

Got it. Even though you used very strong of the proceeds from the sale to fund the FHLB repayment?

I – we were looking at them from an independent perspective, right? So when we announced the Oritani transaction, we announced the $635 million. So the save that was going to come from that was largely a function of just reinvesting or reborrowing back in different term debt at a lower rate. It so happened that we were able to, as Tom identified, enter into this unique transaction that they coincided in the same quarter. That said, they really were an independent transaction. And in our mind, once again, the FHLB transaction that we did on the borrowings was largely connected with what we’re doing from the Oritani deal and really utilizing some of that excess capital.

Got you. Okay. So if – assuming there is no gain, which is my assumption or we can’t make that assumption, this could have been a net negative from you guys in day one. But you’re just saying you want to do, because strategically, it makes you a better bank going forward even if you lost money on this transaction. Is that…

So I don’t think over the long-term, we lost money on the transaction. I think when you look at make-whole payments when it comes to any FHLB transaction, you pretty much come up neutral. I mean, it’s a really a time value of money, which your forecasted sales are versus what your onetime prepayment penalty is. I think for us, as we looked at it, what was the additional capital that we acquired through the Oritani transaction. How much of that additional capital we needed versus where we wanted to be on an EPS perspective on a prospective basis. And it was really just the balance of those two. Once again, separately, we entered into a unique transaction that provides us an opportunity, as Tom mentioned, to reduce some of our exposure to the New York City marketplace. And we were able to really move forward with that. In addition to reducing some of that exposure, I think, as Tom alluded to, those were really transactions that didn’t provide us opportunity to cross-sell from a relationship perspective. So we think it’s a much more efficient use of capital on a go-forward basis.

I see. Okay. That helps. And then maybe my second question, if I may. What was the PAA adjustment during the quarter? And how much of that add to NIM and NII? Thanks.

So the – this is Mike. So the total credit-related mark was $28 million, of which roughly half of that is the credit interest portion of it. And that has a average life of about four years.

Sorry, I meant the piece that actually flowed through NII in the quarter?

I think what we’re giving you is – that’s one thing we’ve tried not to really do with regard to many transactions. So it might give you a number of $14 million broken out over a four-year period. So you can back into a number for what the one month would have looked like, and it’s really an immaterial number. For us, I think, as we try to look at forward earnings, we try to make them as sustainable as possible and not have a lot of purchase accounting adjustments within them.

Okay, thank you very much.

Our next question comes from Frank Schiraldi with Piper Sandler. Your line is now open.

Hey, good morning, guys. Just on the loan growth assumptions for 2020, just wondering what that 6% to 8% might include in terms of runoff of the multifamily portfolio?

Hey, Frank, it’s Tom again. I think the multifamily portfolio, New York piece is now stands at about $1.4 billion, pretty strong loan-to-values during that kind of 50 to 60 range, depending on the Oritani versus our legacy Valley portfolio. The Valley portfolio is all customer relationship-driven. So we’re not anticipating significant runoff, we’ll selectively participate and do new business there. Keep in mind, this was not a major part of our business in the past. The yields were always low. We only give these loans to people we knew well, long time customers that were really deposit or relationship-driven. So there could be an expectation that we will see some repayment through the normal course of business, maybe a little bit extra. But I think with what we’ve built in other aspects of our business will make up for that. Keep in mind, Mike mentioned the granular nature of the portfolio at $2.4 million of average CRE loan, $375 million on the C&I side on that new production. We’ll – that’s our focus. Our focus is to be well diversified without any reliance on any significant asset class. So we’re going to continue that approach, and we expect to meet the 6% to 8% guidance.

I’m sorry, how much time did you say is New York multifamily with the Oritani…

$1.4 billion, $600 million is legacy Valley, about $800 million – a little over $800 million is Oritani. And again, the loan-to-value on the Valley piece is around 60%, on a Oritani piece is 48%. All has performed, and we expect that to continue.

I think if you look at 2019 as a guide, we originated about $6.2 billion in total loans across the entire footprint and in each of the individual products. I think for us, as we we’ve continued to move forward, there’s absolutely not a focus on expanding the multifamily portfolio. So balances are expected to really remain pretty much flat. So I think as we commented on where we saw growth this year within the Florida and Alabama footprint to a larger degree than maybe some of the other areas as well as within that C&I product that is probably going to continue for next year for us.

Okay. And just as a follow-up then, the sale in the quarter, if you could maybe just talk through, why that bucket was a bit different? In terms of – because it sounds like credit quality was still fine there. What made – given the pickup in capital from Oritani, and then you mentioned CECL also is a smaller relative mark. Why you decided to sell this bucket as opposed to let it run off over time or get replaced over time. So what’s different between this and the rest of the portfolio?

Yes, this bucket was a transaction-oriented bucket of loans. There was no deposits associated with it. Our loan-to-deposit ratio was quite high in this piece, the balance of our portfolio is relationship-driven. It’s the people that we have long-term relationships that use us for many products and services. So again, it was really assessing our capital allocation, getting out of lower yielding, non-relationship businesses and focusing our attention on return and relationship-driven businesses. It’s return against volume.

Okay. And then, I’m sorry, you might have said but this was not part of Oritani’s portfolio, this multifamily sold?

It was not part of Oritani’s portfolio, it was a Valley portfolio.

Great, okay. Thank you.

Thanks, Frank.

Our next question comes from Steven Alexopoulos with JP Morgan. Your line is now open.

Hi, good morning. This is Alex Lau on for Steve. So post your – the closing of Oritani, can you give an update on branch consolidations? And also an update on underperforming branches? Thanks.

Sure. Alex, it’s Tom Iadanza again. We’ve identified and announced that there are nine branches, all in less than a mile from each other that will be closed as part of the acquisition. That’s what we’re announcing. And that’s where we are today. With regards to the Valley branches and our branch transformation. We had a previous calls announced, we would be reducing the Valley footprint by 10 branches during 2020. We’re still on target for that. I think on the positive side, the retention of deposits in the closed branches has been very high. And it’s really the – based on us getting out in front of the customers and getting to them early and making sure that we have a lot of contact and retain a high percentage of those deposits. And if I recall, they’re in an 85% retention or so range. We’ll continue to manage it that way. We do manage our branches individually and just to make sure that we have the right mix of deposits, right mix of people, the right service levels, our focus in our branches today are really service and sales oriented, and it’s important to us. We did complete the renovation and the new model look of our first eight branches. And I’m speaking as a proud father on this, they came out extremely well, and it’s been well received by our customer base. So we’re on track and on the way with our branch transformation.

Thanks for that. And just the follow-up. On your loan-to-deposit ratio with Oritani, what is the – can you remind me the range that you’re comfortable with? And would that be below 100%?

Yes. So as we’ve said in the past, the same range on the top still exists. So we’re looking for something in the neighborhood of 95% to 105%. So it’s the same as it was before.

Okay, thank you.

Our next question comes from David Chiaverini with Wedbush Securities. Your line is now open.

Hi, thanks. A couple of questions for you. So starting off, looking on Slide 8 where it shows the loan yield portfolio in the origination yields, so the origination yields were 4.1%, the overall portfolio is 4.51%. I was curious – and I heard your comment about how the NIM in the first quarter should be under some modest pressure. But I’m curious, if we think longer term, given the roughly 40 basis point spread between what you’re originating loans at and what the overall portfolio yield is at, should we expect additional pressure kind of through 2020?

Yes. So absent the comments we made about the first quarter, which I think you have right, keep in mind that our spread, as I said in my prepared remarks, was up 17 basis points. And so I think we’re seeing some slowing in the rate of decline here. As I said, it’s not – we’re not really call it bottom yet on it, but it’s certainly encouraging maybe that those two lines in the bottom left quadrant of the slide would start to narrow somewhat.

Okay, great. Thanks for that. And then on the other side of the equation, now that you prepaid the expensive FHLB debt, and that some of your cost of deposits are coming down, do you happen to have what the kind of blended spot rate, cost of deposits or cost of funds, I should say, total cost of funds at December 31 was? That way it can give us an indication as to what to expect into the first quarter.

We’re going to look. David, I don’t think we have that handy, but I can certainly reach out you afterwards with that.

Okay. And then last one related to that is – and I like this slide where you’re showing the cumulative cash flow gap. And you show that the maturing CD rates are in the 2 – 2.2% range. What are you guys renewing CDs at currently?

So I’ll answer that in two parts. First, one of the things that management tracks very well here is the retention of those CDs as well. And so those have ranged from roughly to – 80% to 90%. For new rollover retained CDS, we’re in the range of 1.5% to 1.7%. So very significant reduction in our funding costs. On this large portfolio, which you can see, we have about $1.7 billion in the first quarter and another $2 billion coming up in the second quarter and then another $1 billion in the third quarter. So it is a significant mover of our potential net interest margin, as we talked about in the third quarter as well.

Great. Thanks very much.

[Operator Instructions] Our next question comes from Collyn Gilbert with KBW. Your line is now open.

Thanks. Good morning, everyone. Just to continue on with the NIM question. So I just want to make sure I understood you all correctly, you are assuming a Fed cut in this guidance. Is that correct?

Yes.

Okay. And then just trying to understand, it seems like if we look at your NII guidance for the year and then some of the moving parts, obviously, to get there, it just seems like the NIM should trend in a much better way than what the NII guidance would imply. So if there is opportunity to be on the upside – I mean, where do you think you’ve a better opportunity, on the funding side? On the asset side? Because I just – it just seems like – and I haven’t run through all the numbers, but it seems like you’re setting up for NII growth to be higher than what you’re offering in the targeted range. So I want to – trying to figure out what I might be missing here?

So I would put it into two buckets, which I think you’ve actually said, first would be our funding costs. The reason that we could not maybe achieve the net interest margin numbers that you might otherwise think are a function of whether or not the curve stays where it is today, whether we have a Fed rate cut or not, the absolute shape of the curve, and then how much we get. So as I said in the third quarter, we’re going to reprice down on the CD and wholesale funding books. The question is how much we’re going to fund down? And we’re going to ladder into that. We’re not going to try to reach some bottom and then pick the right time to do that. The second part would be on the earning asset side of the loan book. And to the extent that we would have loan growth higher than what we’re guiding to, clearly, we would have an increase in net interest margin.

Okay.

I think, Collyn, when you look at it – I think you obviously highlighted the two key points there. But I think when you look at it, we have an unbelievable amount of deposits as well as other types of funding that’s going to reprice based on where the cost is today versus where we’re seeing overall market rates. And then on the asset side, obviously, there’s a significant amount of assets that are tied to short-term indexes. So if there was a rate move, right off the bat, there’s an immediate negative reaction to our NIM. That said, over the longer period of time, it is absolutely accretive to us as we continue to move forward. Hopefully that helps?

Okay, okay. And then, Mike, just to clarify, your comments was that one quarter NIM would be down? Is that what you’re insinuating on the margin?

Well, you have to consider a couple of factors. First, you got a different day count in the first quarter. You’ve also got a full quarter’s worth of Oritani, which has a different NIM than legacy Valley. So there’s – those two right there provide some headwinds.

Okay, okay. And then my last question is on – can you provide us with the guide on the tax credit expense for the year?

I want to make sure I understand your question. It’s…

The amortization expense?

Yes. 24% to 26% flat.

Sorry, not the tax rate, the tax credit?

Yes. I think we’re flat from where we were in the 4Q. I think your point is, right, a few years ago, we used to show a little bit of all in the fourth quarter based on the activity and the different types of instruments we were in. So I think we’re running around $4 million a quarter now, and that’s probably a good run rate for us, as we continue to move forward into 2020.

Okay, okay. I’ll leave it there. Thanks guys.

Thanks, Collyn.

And we have a follow-up question from David Chiaverini with Wedbush Securities. Your line is now open.

Thanks for taking the follow-up. So I wanted to touch on expenses. So previously, you’ve given an absolute dollar kind of expense range for the next quarter or possibly two quarters. I was wondering if you had any thoughts as to what a normalized kind of expense run rate looking out to the first quarter would be?

This is Mike. So obviously, we’re not going to give guidance on an expense increase year-over-year. You can kind of back into it given our efficiency ratio. But I will say this, that we demonstrated operating leverage in 2019, we want to continue that operating leverage. And given the guidance that we laid out, I’m pretty sure when you put that into your model, you’re going to see that operating leverage continue. And just to give you some idea, that was about 2:1 in 2019.

Okay, thanks for that. And then question on other income. Is – it was higher-than-expected the past couple of quarters at $19 million in the third quarter, $17 million in the fourth quarter, just curious what to kind of expect in this line item going forward? I think you mentioned earlier that there might be a little bit of some seasonal weakness in the first quarter, but is low-teen kind of a good run rate there?

Yes. I want to make sure I direct you to the right slide here. Here we go. So if you take a look at Slide 5, you can see the components of that. And the largest portion is the bottom, which is that kind of dark blue which is the swap income. And as we said in the third quarter, we feel that the sheer level of swaps that were done was elevated, came down a little bit in the fourth quarter, like we said. So I just think that in order for this to move meaningfully, it’s probably going to come out of that category, and it’s been averaging about $13 million to $15 million a quarter.

Got it. Thanks very much.

And at this time, I’m showing no further questions, I’d like to turn the call back over to Mr. Rick Kraemer for any closing remarks.

Well, thank you all for joining us for earnings conference call. We look forward to speaking with you again next quarter.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.