Ladies and gentlemen, thank you for standing by. And welcome to the Valley National Bancorp Second Quarter Earnings Call. At this time, all participant lines are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I’d now like to hand the conference over to your host today, Mr. Travis Lan, Head of Investor Relations.

Good morning. And welcome to Valley’s second 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 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 two of our earnings presentation and remind you that comments made during this call may contain forward-looking statements relating to Valley National Bancorp, 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 will turn the call over to Ira Robbins.

Thank you, Travis, and welcome to all the participants on the call. This morning, I will provide some perspective on Valley’s strong year-to-date performance in the context of a challenging operating environment. Mike will offer additional details on the financial results before opening the call to your questions. On our earnings call in April, we outlined organizational efforts to support our employees, clients, and communities amidst the COVID-19 pandemic. While I will not reiterate each of those efforts this morning, I will provide an update on a few key highlights that speak to Valley’s culture, performance and value proposition. Valley originated over $2.2 billion of loans under the Paycheck Protection Program. Approximately 85% of these loans were for balances below 250,000, and our median originated loan size was just $43,000. While these numbers reflect the macro overview of the program, they only broadly speak to the external community impact. More specifically, we estimate that loans facilitated by Valley employees help preserve over 170,000 jobs within our marketplace. Equally important, nearly 30% of our PPP loans were provided to minority-owned businesses, non-profits, or women-owned small businesses. With a purposeful direction, our PPP response was differentiated by our high touch service, which leveraged in internally developed digital process made possible by the efforts and commitment of our employees. As we begin to transition to loan forgiveness, more hard work is ahead of us. We remain committed to helping our clients understand the changing regulations around the program and to easing the forgiveness process for these small businesses. We believe Valley will continue to distinguish ourselves from our peers through this process by providing a unique customer experience led by people and supported by best-in-class technology. To-date, Valley has granted over 10,000 loan deferrals, totaling approximately $4.6 billion. We have closely monitored the…

Thank you, Ira. Turning to slide five, highlighting our quarterly net interest income and margin trends, Valley’s reported net interest margin was 3% versus 3.07% in the first quarter of 2020. Our decision to hold the higher cash balance in the quarter impacted our margin by approximately 8 basis points. Exclusive of this, our net interest margin would have increased for the third consecutive quarter reflecting the positive impact of our aggressive funding cost reductions. On a sequential basis, our cost of interest bearing liabilities improved by 54 basis points to 0.96%, and our interest expense declined by approximately 33%. We had previously identified the meaningful and unique funding cost reduction opportunity available to us. We were able to capitalize on this opportunity which enabled us to absorb asset yield pressures and drive strong net interest income growth from the prior quarter. While a significant amount of our re-pricing opportunity has been captured already, slide six identifies the amount of retail CDs expected to mature in the next 12 months at rates well above current offering rates. Specifically, over the next three quarters, we have roughly $4 billion of retail CDs maturing at costs around or above 1.4%. Slide seven illustrates the significant reduction in deposit costs achieved over the last few months. On a quarterly basis, our interest-bearing deposit costs declined 57 basis points to 0.83%. Our all-in cost of funds improved to 0.73% from 1.2% in the first quarter due to deposit cost reductions and significant non-interest bearing growth. While CD costs declined 53 basis points sequentially, there may be room to further reduce those costs. As illustrated on slide six in the third quarter, we have $1.9 billion of retail CDs maturing at a cost of 1.38%. From a balance perspective, total deposits increased $2.4 billion or…

Thanks, Mike. The headline risk of COVID-19 has somewhat overshadowed Valley’s extremely strong year-to-date performance. We have produced significant positive operating leverage, which has led to a meaningful improvement in our pre-provision profitability. Over the last few years Valley has become a more dynamic and nimble institution, and we remain well-positioned to serve the diverse financial needs of our clients. I am extremely proud of the immense effort put in by our team and I know that this hard work will continue to payoff for our company and our shareholders. With that, I’d now like to turn the call back over to the operator to begin Q&A. Thank you.

[Operator Instructions] Our first question comes from the line of Frank Schiraldi with Piper Sandler. Your line is now open.

Good morning.

Good morning, Frank.

Just I wanted to ask on deferrals. I mean, looking at the presentation, it really does seem pretty remarkable looking at sort of some of the highly sensitive areas like hotels, and how much those deferral rates have come down? I guess, part of those [Technical Difficulty] base already, but I just wanted to ask about Florida, I heard anecdotally that hotel occupancy rates down in Florida were quite high in the early stages of the pandemic, and I am assuming it changed and so I was just wondering your thoughts about and what you have seen so far in terms of deferral look -- your deferral requests down there and how do you anticipate that might trend?

Sure. Frank, it’s Tom Iadanza. I will try my best to piece together the question you are breaking up a little bit. As slide four pointed out that we had total deferrals at a high point of $4.6 billion, $3.9 billion of that was commercial related and $3.5 billion of that $3.9 billion is secured by real estate. There was no significance by region. Every region was distributed a third to Florida or Alabama, two-thirds to New York, New Jersey, which is our distribution of our total loan portfolio. On the Florida side, it does have the predominant level of leisure and hotel hospitality portfolio, but I will tell you of that portfolio, we have $193 million of deferred loans, $138 million met that first 90-day expiration period, and of that amount, $133 million went back to full pay. That’s our hotel experience, and our total hotel book is $488 million. So 96% of that hotel deferral went back to full pay after 90 days, okay? So, we are encouraged by the trends and give you a little bit more highlight because the experience is broad based. We are seeing that within New York, New Jersey, Florida and Alabama, you will look at that retail book we have which is another high profile, high risk component that we consider the high risk component. We had 90, let me get to the numbers, 90% of that retail go back to full pay, $359 million met that 90-day period, and $323 million went back to full pay. So, there was a 90% experience, again, no different in Florida than New York and Alabama.

So even now with Florida, having a tougher time, are you not seeing any change?

No. No. Keep in mind, all of it is secured. We predominantly flagged based on our hotels, we have personal guarantees. These are people who we have done business with for a longtime who have weathered cycles in the past. We conservatively underwrite. The average loan to value on that portfolio was 56% at origination, and the debt service coverage was 1.7 times pre-pandemic. So, we believe there was a bit of a cushion in there before we even have to get and rely on the guarantees, but the guarantors are stepping up and they are relatively liquid people for the most part.

Frank, this is Ira. I think on an anecdotal basis, getting to, I think, the point of your comment is, in our conversations with many of our borrowers down to the Florida footprint, I think some of the headlines of the newspapers are really disconnected with what they are seeing from an experience perspective as occupancy rates really haven’t changed that much.

Okay. And then just…

We don’t -- we don’t have -- sorry, Frank, we don’t have the large…

No. No. Go ahead.

…amount of percentage, it’s mostly around travel and tourism.

Okay. And then just lastly, just the NIM, if I set aside liquidity, it seems like with the CDs coming up for a re-pricing still, are you guys confident in core NIM expansion and NII expansion from here into 3Q?

Yeah. Frank, this is Mike. Well, I wouldn’t say core NIM expansion necessarily, I would say, NIM protection. So, I think as the slide shows that we have used many times, I think it’s slide six, if I am not mistaken, yes. That opportunity to re-price a lot of our funding sources gives us the ability to offset the reductions that we are going to see on the earning asset side. And don’t forget that part of that liquidity bill that I referenced in my prepared remarks is a result that we are essentially not buying any new fixed income securities for our investment portfolio, and think of that as basically insurance, because I think the cash flows we would buy today are pretty much the same cash flows we buy in the not too distant future, and so we are going to try to stay liquid in the hopes that maybe this COVID situation gets better, and we will see some slightly upward take in interest rates.

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

Hi. Good morning. This is Alex Lau on for Steve.

Hi, Alex.

I just had a question on fee income, so it’s down a bit from your waived fees for the quarter. Can you just talk about what you are doing on that front and what do you expect for the rest of the year? Thanks.

I think right off the bat, consistent with many other banks in the country, we elected to waive fees for many of our customers that were impacted by COVID-19. That said, it is a small component of the entire non-interest income base, and we have gone back to adjusting fee schedule accordingly.

Thank you.

Our next question comes from Collyn Gilbert with KBW. Your line is now open.

Thanks. Good morning, everyone.

Good morning

Good morning.

Mike maybe if we could just start on the NIM, just to follow-up your -- with your comment about liquidity and just how you are positioning yourself on the deposit side. So just to understand, the intention is to keep – is to maintain that liquidity, and I am just trying to draw that with because I presume a lot of that came from the PPP deposits and how you are thinking of the ultimate outflow on that, so just if you could kind of walk through some of the moving parts on how you are seeing some of that -- the liquidity movement?

Yeah. So, on the first part of your question as you might have noticed from the prior comments we have made in the first quarter. We have released some of that liquidity already, roughly around $500 million so far. So the goal isn’t to hold onto that kind of indefinitely and I think you will see us selectively use that where we think it makes sense. So I can’t promise you that we are going to do that in the third quarter necessarily, we may. But no, we are not going to hold onto those higher levels longer term. And basically when this thing started out, liquidity was obviously the biggest risk. I think now the liquidity risk relative to the industry has abated quite a bit.

Okay.

And then the second part of your question.

Yeah. Just on the PPP side. So we are hearing kind of mixed things in terms of what the ultimate borrower kind of usage is of those dollars. But how are you sort of expecting kind of the non-interest-bearing deposit flows could go as it relates to the PPP deposits that built this quarter?

Yeah. So, we had originally forecast that we would start to see some of that in the third quarter at least in a meaningful way. Now I think that’s going to be pushed off to maybe fourth quarter to first quarter of next year. And keep in mind, those yields, based upon the size of them because the fee income is different and the income accretes through there is roughly around 3.26% for us. So it’s a little bit -- it’s obviously less in the portfolio, but it’s getting pretty close to where new loan volume is coming on as well.

Yeah. And Collyn, it’s Tom. I just want to add that 21% of our PPP loans were to customers previously not with Valley. We generated approximately $150 million in deposits that were non-PPP loan-related deposits with that group and with an opportunity to solicit for even more. We have an active program going after that based up what we now have as new prospects to generate even more deposits of business from it.

Our next question comes from Steven Duong with RBC Capital Markets. Your line is now open.

Hi. Good morning, guys.

Good morning.

Just a question on your reserves, the 99 basis points now, that’s almost double your fourth quarter level. So with CECL that basically implies that you are looking at about 45 basis points of credit loss through the cycle and the assumption is based on a double-digit unemployment rate through 2021, is that right?

So I won’t specifically address the 45 basis points, but I am going to point you back to the fact that the model is incredibly sensitive to the economic forecast. Most likely or the most impactful impacts are on GDP and unemployment. And so -- I will tell you the percentages that we use so you can get a better feel as to where that comes out on a weighted average basis. So for the second quarter, we used Moody’s June estimates and we use 50% for their S3 scenario, 20% for S4 and 30% for baseline. And to give you an idea of how the dispersion is different between those baseline had GDP for third quarter coming in at 17.2% and S4 has it at 1.7%, so on a weighted average basis it’s 9.2% positive. Now when you look at the forward next seven quarters, it goes negative in the fourth quarter, it goes negative in the first quarter. And as I said in my prepared remarks, the unemployment rate is above 11%, whereas in prior estimates that was more around 9% when you start to look forward. So it’s gotten worse on the unemployment side and it’s gotten less optimistic if you will on the GDP side.

Got it. And I guess how would like your reserve level compared to where you guys were in the financial crisis?

This is Ira. I think is really got to be aggregated together with even where our capital position was. So when we went into the last financial crisis we started with the TC number about 5.7% -- 5.75% and we are seeing today on an adjusted basis if you account for liquidity, as well as the PPP loans as close to 7.70%. So we are about 200 basis points more in capital today than we went into the initial financial crisis. On the coverage ratio with regard to the overall loan portfolio we think we are in a real solid position as well. So on an area basis we think we have a lot more reserves from a capital and provision perspective than what we did last time.

Our next question comes from Matthew Breese with Stephens. Your line is now open.

Good morning.

Good morning.

Good morning.

Hey. Just in regards to the provision, how much of the $40 million was qualitatively driven, how does that compare to last quarter? And then with more stability in the Moody’s forecast, should we view the majority of the reserve build in the rearview mirror at this point and pricing level should start to just reflect growth in charge-offs?

So the qualitative part was not a large portion of the $41 million. And as it relates to your second part of your question, personally I think you might see people, I don’t think Valley is the only institution that will do this, I think, there might be some less reliance on the baseline. As you can see even from our weightings we only used 30% for the baseline this time, because I think generally people believe this might last a little bit longer and so if you get that economic impact into your model you might heavily wait. So that would be a bigger driver I think of future reserve build as I said earlier than just changes per se to the Moody’s estimate that will impact it, but I think the weightings will be a bigger impact.

Understood. And then on the expense front you point to $2.2 million of COVID expenses this quarter, $2.1 million last quarter, a lot of that is in regards to readiness? Should we start to see these figures start to wind down and therefore expenses can start to flatten out or come down and then you also mentioned potential room for expense saves? Could you just talk about some of the areas where you see that’s possible and to what extent?

So on the $2.2 million to give you some breakdown on that numbers, roughly $750,000 of that is related to enhanced cleaning procedures that we have had to do and that is going to be directly correlated to outbreaks in hotspots within our footprint. So over time you would hope that that would come down. There’s some marketing related costs and I suppose you could argue well those are COVID related or not but they are specifically related to our recovery CD that we have launched and we have also launched a Phase 2 of that as well. And then also inside of there -- that I don’t believe will be a recurring at least in any material way, our expenses related to getting ourselves opened up to the various wave process that we are using. Things like decals on the four of elevators, signage in different places, plexiglass, sneeze guards in the certain locations, all of that is in that number as well and that should over time reduce itself.

And Matt, this is Ira. Just following up on your second comment, we still believe that there is significant opportunity to relook at our business model and improve the operating efficiency further. I think as we continue to enhance the technology platform that we sit on there will be operational saves as we continue to move over across all facets of the organization. If you recall about two years ago we presented to you what branch transformation look like at Valley, up until this point we probably exceeded some of them the metrics and numbers that we provided to you. If you notice we didn’t provide anything this time from an update we think it’s prudent for us to really reassess the entire platform that we have within the organization when it comes to real estate expenses and we continue to look at that and is there more opportunity to look at real estate and not just from a branch perspective but from a corporate perspective as well. In addition there’s probably a little bit left on the Oritani.

[Operator Instructions] We have a follow-up question from the line of Collyn Gilbert with KBW. Your line is now open.

Thanks, guys. Sorry, I wasn’t finished. I could probably ask questions for three hours, but I hope you would agree. Just -- so Mike, sorry, just equivalent to that one on the NIM. So you have indicated that there may be room on the retail deposit side to lower again. It just -- it seems like there’s more than maybe room. What would keep you from being more aggressive in dropping some of those retail CD costs?

I said that there may be some room that that’s probably just me doing my normal hedging. There is absolutely and that’s what slide six shows. Those rates that you are seeing in the third quarter as an example, $138 million from a trailing CD, 65 bps for borrowing and BCDs at $59 million. We know that at today’s rates we will be able to buy those same funding sources at lower rates. So absolutely we are going to continue to see that. The issue…

Okay. Okay.

… around saying a specific number is especially with the CD book it depends on what maturity we want to do. We have been -- as this whole thing has been going on kind of silently we have been building a nice ladder and extending out some of our longer term deposits.

And I think, Collyn, when you look at the overall deposit book, I think, we get criticized a bit based on the cost of deposits within the organization, I know a lot of that is a function of the market that we operate within. But we were very, very aggressive compared to many of our peers and dropping rates. I mean our cost of deposits including non-interest bearing went to 60 basis points this quarter from 107 basis points the quarter before and 127 basis points a year ago. So we dropped 44% just on a linked-quarter basis. We didn’t have any account attrition. In reality, we increased 6,000 units of non-interest bearing accounts during the quarter. I think it shows the stickiness of the types of deposits we have and we are real excited about the opportunity.

Yeah. To Ira’s point, I would point you to slide seven and take a look at the savings now in money market accounts and the growth there. I think that illustrates what he’s talking about.

Okay. Okay. That’s helpful. And then just some clarity on some of the fee movements, so first in terms of just your outlook on mortgage banking and where you see that trending kind of in the back half of the year if there’s a lot of pull-through that happened in the second quarter or if you expect activity to sort of remain elevated as we move into the back half of the year?

Hey, Collyn. It’s Tom. Yeah. When you look at our second quarter, 66% of our business was conforming for sale mortgage, 34% balance was general. The refinance market is active, is strong as you would expect in this interest rate environment. We are pulling through on a similar basis so far in the third quarter. Our pipeline remains somewhat elevated from, I’d say, first quarter similar to where the same line in second quarters we were as we are now.

We have a follow-up question from the line of Matthew Breese with Stephens. Your line is now open.

Yeah. Just one more for me guys, just in terms of the deferrals, I think, you said, 90% -- there was a 90% curate on the commercial loans that came up. What was that on the consumer side and is there any reason to believe that blended curate quote-unquote is not something we should apply to the remaining $2.7 billion of deferrals?

Yeah. It -- I don’t want to go out, Matt. It’s Tom. It’s -- we had $525 million on the residential mortgage fees, approximately $300 million of that came due, 60% requested second, and keep in mind we do 90% plus 90%. So, 60% requested as second deferrals, 40% went on to full pay. On our auto piece, which is the bulk of the balance of our consumer, we had $116 million in total, $80 million came up as that -- met that first period, $72 million went on full pace, so that was 90%. So, I think, we are going to be -- those percentages, again, I think, are in line with what we would have expected to see in those two categories.

And Matt, I just think this speaks to the volume as to who Valley is and how we underwrite and the real differentiation here of our borrowers versus many of our peers.

Understood. Thank you very much. I appreciate the follow-up.

Thank you.

And that concludes today’s question-and-answer session. I’d like to turn the call back to Mr. Robbins for closing remarks.

Thank you so much for all of us joining us today. You can tell by the tone in our comments today where we are really excited about their -- the quarter’s performance, not just from an earnings perspective, but from a credit quality perspective as well and we look forward to talking to you next quarter. Thank you.

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