Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Valley National Bancorp Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker, Mr. Travis Lan, Director of Investor Relations. Please go ahead.

Good morning, and welcome to Valley’s first quarter 2020 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 you first quarter earnings release and supporting documents can be found in our company website at Valley.com. When discussing our results, we refer to non-GAAP measures, which may 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 and the impact of the COVID-19 pandemic. 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. Good morning, and welcome to those of you that have joined the call today. On behalf of the Valley team, we hope that you and your families remain safe and healthy during this challenging time. This morning, I will update you on efforts that we have taken to support our employees, clients and communities amidst the COVID-19 pandemic. Mike will then offer details on the financial results, CECL implementation and our recent liquidity initiatives before opening the call up to your questions. The global health crisis brought on by the spread of COVID-19 has quickly changed our world in many ways. For the first time, our management team is hosting this quarterly call remotely. This is consistent with our business continuity plan, as well as the social distancing guidelines and work-from-home procedures that have become the norm. COVID-19 has also brought significant and rapid changes to the operating environment for our company. For the last few years, we have messaged our ongoing technology transformation and tailored [ph] the significant strength, diversity and depth of our management team. Over the last two months, these forces have come together and driven Valley’s swift and decisive crisis response. Our agile technology enabled a quick and effective work-from-home transition for 93% of our non-retail employees. Further, we leveraged our technology platform to create an efficient digital application process for the SBA’s Paycheck Protection Program, which I will highlight in more detail momentarily. In February and early March, our finance and treasury teams were quick to lower deposit costs in response to declining interest rates. These efforts were made possible by an engaged and flexible response from our deposit operations team and branch network and help to offset earning asset yield pressure and insulate our net interest margin during the quarter. While…

Thank you, Ira. Turning to Slide 7, highlighting our quarterly net interest income and margin trends. Valley’s reported net interest margin increased to 3.07% from 2.96% in the fourth quarter of 2019. The first quarter’s margin includes 9 basis points of benefit from higher accretion on purchased credit deteriorated loans that resulted from the implementation of CECL. Exclusive of this, net interest margin on an adjusted basis was 2.98%, up 2 basis points sequentially. This is a continuation of the upward trend experienced in the fourth quarter of 2019, and reflects our success in quickly reducing non-maturity deposit costs, as benchmark interest rates declined in the quarter. On the deposit side, we continue to experience customer rotation out of CDs and into non-interest and transaction accounts. Going forward, we believe that there’s additional room to reprice CDs and wholesale funding sources lower as these liabilities mature. This opportunity is outlined on Slide 8. Earlier Ira mentioned certain initiatives that we undertook during the quarter to build liquidity and ensure we have the balance sheet resources necessary to respond to our customers’ needs during these uncertain times. In the last two weeks of March, we added $1.4 billion of FHLB advances with a weighted average term of 4.5 months. By utilizing swaps on a portion of the advances, the all-in cost of these advances will be roughly 20 basis points. Subsequent to quarter-end, we added an additional $400 million of short-term FHLB advances and over $1.4 billion in brokerage CDs, with a weighted average term of 8.5 months and a weighted average cost of 1.2%. As a result of our liquidity actions, quarter-end cash and equivalents exceed $1 billion. While this excess liquidity may produce a modest near-term drag on our net interest margin, we firmly believe that these efforts are…

Thanks, Mike. Obviously, our prepared remarks this quarter are somewhat different from what we have provided in the past. These are unique and challenging times. However, I would like to reiterate that on all fronts, Valley’s response to the crisis has been swift and decisive and early outcomes have been positive, all largely reflective of a strong leadership team we have assembled. I firmly believe in times like this, our ability to be agile, proactive in our focus, steadfast in our strategy and commitment to Valley combination being an unbelievable differentiator for Valley and our shareholders. We will continue to operate with a sense of urgency and navigate the uncertain future with an eye to the future and the unbridled opportunities now available. With that, I’d now like to turn the call back over to the operator to begin Q&A. Thank you.

Thank you. [Operator Instructions] Our first question comes from Frank Schiraldi with Piper Sandler. Please go ahead.

Good morning, guys.

Good morning, Frank.

Good morning.

Just on – I wonder if you could talk a little bit about your provisioning – your thoughts on provisioning going forward. It sounds like you’ve captured sort of a lot of what the models spinning out right now – currently in terms of this first quarter provision. But is there another leg up in your mind later in the year when you start to see some of these quantitative factors form in terms of if it’s – whether it’s increased NPAs or ultimately increased charge-offs? Thanks

Hi, Frank, it’s Mike. I’ll take a stab at this one. The CECL models, regardless of who has them are primarily dependent upon the loss history. So these are probability of default, and then loss given default models. So the loss history that you have built into your model is going to be the primary driver of what your future view your life of loss loan would be. However, I do want to point out, and I hopefully talked about this in my prepared remarks. We made a change late in the quarter to look at a more severe scenario as more and more information was coming out related to COVID. And so we use a blended model of various economic forecasts from Moody’s to come up with that economic forecast. And in the end, that change resulted in GDP reductions of 24% in the second quarter and U3 unemployment of 12.5%, which we think right now that should cover, as we see it today, the loan losses.

And maybe just following-up a bit on that, Frank, if we were to use the Moody’s model as of mid-April, we would have only seen about a $5.5 million increase when that reserve number was. So I think we were pretty aggressive. Back to your point regarding the quantitative metrics, I think, that’s the challenge for all of us and looking at what the reserves look like today. We’re not going to know until third quarter until many of these loans come off of deferral as to what the impact is to some of this quantitative metric that Mike talked about before.

All right. Okay. And then just a follow-up. In terms of – as you guys are doing your internal stress testing, when you look at your severely adverse scenario, anything you can share with us in terms of how comfortable you are with what sort of capital cushion you’re left with after losses in that scenario? And how comfortable you are with the dividend in a scenario like that? Thanks.

Sure. So if you look backwards at the 2018 severely adverse scenario, we believe, based upon that, that our 0.96% reserve would cover approximately 0.87 times the cumulative severe loss rate. From our looking at other people that have reported so far, we think their numbers are closer to 0.5x or 0.6x. So we think we’re in a pretty good position there. And I would say, ultimately, the Moody’s S3, which would be the more significantly adverse scenario, we’re at 0.91. So on a relative basis, we feel pretty good about where we came out.

Okay. And then the dividend in terms of in those scenarios, I would assume, given where you come out that the dividend is part of that stress testing?

Absolutely and we run, obviously, as Mike alluded to a lot of different stress tests over the years, a lot of them based on the severely adverse scenarios that were provided by the FRB, as well as our own internal stress test, focused on some of the other variables that we think drive performance within the organization. Right now, when we look at those stress performances, we think we have sufficient capital. I’ll just highlight. Last year, at this time, we were sitting at 6.63% as a TC to TA. Today, we’re sitting at 7.30% – 7.31%. Our Tier 1 leverage ratio went from 7.58% to 8.24%. Tier 1 risk-based went to 9.38% to 9.95%. If you go back to when we started back in 2007-ish timeframe, we were only sitting at a TC of 6% when we entered the last major recession. So I think, as an organization, we’re in a much stronger position than we were previously.

Thank you. Our next question will come from Steven Alexopoulos with JPMorgan. Please go ahead.

Hi, good morning. This is Alex Lau on for Steve.

Good morning, Alex.

First question on NIM. So with pressure coming on from the earning asset yield side, how do you think about how much deposit costs can offset this? And what do you think about the trajectory of net interest income and NIM into the next quarter?

So first, I would say that, we’re working hard to protect our NIM, and we have some tailwinds, I think, that make us a little unique right now in the space. First, as you see on Page or on Slide #8, you can see the repricing that we have that’s going to occur in the second quarter for both our originated CD book, as well as the brokerage CD book. When you look at that and combine it with the non-maturity and, frankly, all other deposit repricing that we did, and we did that early when the Fed reduced rates and we were fairly aggressive. And as I said in my prepared remarks, we went from a total cost on the non-maturity side of 1.04%, another 50 basis points down. We think we are doing about as good a job there as we can to protect the NIM. While admitting clearly that on the earning asset side, yields are going to go down, but also we put floors in to kind of protect the NIM there as well.

Thanks for that. And then just on your Slide 11, where you give COVID exposures by loan segments, you mentioned that there’s 70% of that are secured by real estate. In this breakdown, in this table, are there any segments that have a larger exposure to those not secured by real estate? And could you give some color on credit quality if there is?

Yes, sure. This is Tom Iadanza. Looking at those high-risk and I’ll just pick the hotel and hospitality as the first one. 45% of our portfolio has requested has been approved for deferment. 100% of that portfolio is secured by real estate, with an origination loan to value of 59%. When you kind of go down each and every one of these, the only one that probably has a low percentage that retail trade, which represents auto dealerships. 50% – a little over 50% of that portfolio is real estate secured, the balance is floor plan. But in general, it’s not a big portion of the deferment, it’s not a big portion of our overall portfolio. In the restaurant space, very similar trend to the hotel space, pretty much 100% secured by real estate, loan-to-value more in the 65%. In each of these categories, we carry personal guarantees. So we believe it’s fairly well protected. But there’s still uncertainty as to when they come out. In Florida, they announced – the governor announced that he is going to allow restaurants to open shortly, but with a lower occupancy than they would be normally permitted to have.

Thank you. Our next question will come from Matthew Breese with Stevens. Please go ahead.

Hey, good morning.

Good morning, Matt.

Good morning, Matt.

Just going back to the reserve. Is there any unamortized marks that you have? And could you quantify that?

Well, there are $6.3 billion of PCD loans remaining in the mark and that is $87 million over eight years. Other than that, no. So…

Okay.

…if you think about that, that’s gong to – we think that’s going to level off. Obviously, we don’t control those loans prepay and you’d accelerate. But no, we think that’s going to level off.

And should we think about that $87 million combined with the allowance as it stands today?

You certainly could if you want to. It obviously doesn’t go through allowance. It goes through interest income and then finds its way hopefully to retained earnings. But you could.

Okay.

It does go and talk calculations on that. So when you look at how we’re thinking about it, when you look at LGDs and PDs and what we think we need to reserve, that $87 million is definitely not a component of it.

Okay. And then, can you talk a little bit about what happened with the early-stage delinquencies this quarter, commercial real estate, especially? What happened? Why the increase? Can you just give us some color on the larger credits and relationships that you referenced?

Sure. It’s Tom again. There was about $48 million increase in the commercial real estate space. $20 million of that was administrative, current for payments, but the loan had matured. All of that has been renewed and is now off past due. The remaining balance was just a mix of low loan-to-value loans that are chronically late in that 30-60 [ph] bucket, but they pay, they stay within those buckets. And our loan-to-value on those is probably sub-40%. And there’s no large – no single large exposure within that category. It’s a group of smaller loans.

Thank you.

I’m sorry. Go ahead.

No, you go ahead, sir.

There is a residential piece in there and is about $18 million. Nine of that is current for payment now and removed. And the other was deferments requested prior to the end of the quarter, but we didn’t process until April.

Thank you. Our next question comes from Collyn Gilbert with KBW. Please go ahead.

Thanks. Good morning, everyone.

Good morning, Collyn.

Just to touch on the reserves and your CECL outlook. And kind of Mike, as you had indicated, so much of what drives the CECL model is your historic loss rates. Overall, when you gave that 91% or so of the reserve now accounts for the Moody’s S3 forecast, that’s really impressive. I think, I guess, my question is, just how are you quantifying the change in the book, right? I know, Ira and I know the culture at Valley, like you guys are so committed to your conservative underwriting standards. But the reality of it is the book changed, right? You’ve moved into different geographies, a lot of the growth or – you’ve accelerating your growth over the last couple of years. So you could argue late cycle asset adds. Just kind of walk us through that, how you’re thinking about the change in the portfolio today relative to what it was pre and post-crisis?

Let me just start and then I’ll turn it over to Mike and Tom. Look, we’re definitely acknowledging we are in some different geographies than what we were in prior. But keep in mind when we went into Florida, we are pretty selective about the banks that we looked to emerge with and then even further selective as to the assets that we put on. If you recall on the CNL transaction, we actually throughout – or not throughout, but let run off about 15% of the book just because it was an asset classes that we weren’t comfortable with. We have a specific asset credit philosophy within this organization, and that does not change irrespective of what geography that we’re in. The borrowers that we look to, those are the people that are the ones that are supporting the individual loan. It’s not a transaction, what the borrower’s exposure is when it comes to contingent liabilities, what their liquidity looks like. These are our core philosophies that we have within the entire organization that we propelled across the entire geography that we’re in. I think we’ve been in some of these geographies for a long enough time that the book represents how we lend, who we are and not necessarily what traditional experience would have been for some other lenders in these markets. And Mike and Tom have some other thoughts.

Coming into this earnings season, we knew that people were going to have a difficulty. And when I say people, I mean, on the analyst side, we’re going to have difficulty trying to look at what does a 0.96% allowance coverage ratio at Valley? What does that mean when you look at it across the universe of other mid-size banks? I would just point you to the fact that our allowance as a percent of loans increased 75% from fourth quarter to first quarter. And by our estimation, our peer group only was up 50%. Why is there a 25% differential? Two things mostly driving this. One, the fact that we used a pretty severe Moody’s economic forecast, a combination of several of their forecast. And then maybe more importantly, to your question Collyn, we also use a – we should have talked about this earlier. We use a qualitative overlay on top of the model as well to account for things that aren’t accounted for in the history in the portfolio. One of those being the Florida portfolio, as an example. So we put on additional loss history for the industry, because we don’t have it ourselves to increase our reserves as well.

And just to add a little bit to that, Collyn. When you look at the metrics of our portfolio, there is no concentration by region, by loan type, by size, we’re still very granular. Our production in the first quarter, our average real estate loan is less than $3 million on our average C&I loan is less than $1 million. So we continue to do the same things that we’ve always done. Looking at it, over 50% of our business is generated from a long-term valued customers. And the balance comes from new customers that we actively been soliciting for years and are all well known to people within the bank. So it is about relationship banking. It is about knowing and it is about being very granular in how we proceed and how we do our business.

Okay. That’s great, additional color. And then just my one follow-up to that would be, and you sort of touched on this. But just as we look at your Slide 11, where you go through the exposed loan segments, obviously, how Florida and New Jersey and New York are behaving through this pandemic are very different? Just curious as to if you have kind of the geographic split between what’s up in these markets versus what’s in Florida in terms of your loan exposures, and then also to where you’re seeing deferral requests?

Yes, sure. The deferral request is pretty much along the lines of the percentage of portfolio we have in each market. We’re not seeing any higher in any one of the regions. Our hotel portfolio, which I described earlier being real estate secured lower loan-to-value going into this is for the most parts more Florida-related than New York, New Jersey-related as is our restaurant portfolio, which again, I described as reliance on real estate at a 65% loan-to-value. Other than that, it’s as dispersed as you would expect within the regions.

Thank you. Our next question comes from Steven Duong with RBC Capital Markets.

Hi, good morning, guys. Just going on that regional breakout, do you guys have the breakout of what’s actually in New York City itself for that COVID exposure?

Yes. We have it broken out by location and by type. The largest exposure in New York City are that we’re realizing our ambulatory centers. We don’t have a big restaurant or hotel exposure in New York City, if any at all. So it’s mostly ambulatory centers, which is a relatively small dollar amount. I think it’s in the $90 million range where we have those in the Manhattan market. We break it into three. 80% of it is affiliated with large hospital systems or necessary care being cancer treatment or knee replacement and 20% is broken into elective surgery. So when you look at that, the hospital affiliations will be fine and they’ll come back. The necessary care will be fine and they’ll come back. The cosmetic care will take a little bit longer to come back. Each of that portfolio is secured, that portfolio carries guarantees from the hospital systems, as well as the physicians that are all and on the latter category. But we haven’t really seen much in office. We haven’t really seen much in multifamily coming out of the Manhattan market.

Great. That’s – appreciate the color on that. And then your CET1 ratio just declined a little bit. Was that just purely the adoption of CECL?

I think that was a little bit of the adoption of CECL. But keep in mind also, we put on additional liquidity during the period and the additional liquidity had a negative impact as well during that first quarter.

Great. Thanks, Ira.

Yep. Thank you.

Thank you. Our next question will come from David Chiaverini with Wedbush Securities.

Hi, thanks. A couple of questions. Starting with the discussion on NIM. It was mentioned earlier in the call about how the deposit inflows positions Valley well for the second quarter. And then later on it was mentioned about how the excess liquidity that’s coming on the balance sheet could pressure NIM in the second quarter and then furthermore, April funding costs being down 50 basis points, certainly a good thing. So long way of saying, are you willing to disclose how much – when we look at April, the earning asset yield, are you able to disclose how much the earning asset yield is expected to come down thus far in April?

Not at this point, obviously, because we’re disclosing first quarter results. But clearly, the the pressure of just rates coming down generally are putting pressure on our earning asset yields. And as we said, we have a lot of cash built up. You might ask, why did we do that? Early on in this crisis, we decided that putting on some amount of liquidity was just prudent, because it was so uncertain as to where this was going to go. And keep in mind that was before things like the PPP Liquidity Facility even existed. So one of the things that we feel pretty strong about is, we have the ability right now to fund all of our PPP loans with the liquidity we’ve built up without even using any of the government’s facilities. Now we may do that. I’m not saying we wouldn’t use it. I’m just saying that our liquidity build put us in a position where we had options.

That’s helpful. Thanks. And then my follow-up is on expenses. You mentioned about how the full synergies from Oritani should be achieved in the second quarter with the conversion – the system’s conversion in the first quarter. Can you remind us how much in expense savings you’re expecting to get from that?

We’ll have to get back to you with an exact number. I can give you one of the main components of it that I think you would probably care to know about. Oritani salary expense for the month of December, remember, we only had them for about one month in the fourth quarter was $1.3 million. And so on a quarterly basis, that would be $3.9 million. But the Oritani salary expense in the first quarter was only $1.8 million, so that’s roughly 54%. And I know on a total basis, our total cost savings right now are running around 70%, just in the first quarter. So we’re almost all the way there and we’ll get the rest of that in the second quarter.

Yes. And just to add, we identified between Oritani and Valley nine branches to the closed through the integration and merger, and those branches weren’t closed until March.

And if you keep in mind those numbers weren’t even in the forecast, the cost saves that we provided. So we’ve already well achieved, many of the cost saves or actually all the cost saves that we identified when we announced the merger. I think to Tom’s and Mike’s point, the economic benefit is going to be much more recognized in the second quarter than what it is in the first quarter.

I’m showing no further questions in the queue at this time. I would now like to turn the call back over to management for any further remarks.

So we want to thank you for taking the time to listen in. I know our prepared comments were a little bit longer than what they usually are. I know the document that we provided is a little bit longer as well. But we wanted to make sure that there was transparency with the entire investor community as to what’s going on in our organization, so that you have a clear look through as to what’s happening here. I want to thank Travis Lan who recently joined us for putting together a lot of the information and Rick Kraemer for all your help as well. Thank you very much.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect and have a wonderful day.