Good day, and thank you for standing by. Welcome to the Fourth Quarter 2021 Valley National Bancorp Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Travis Lan, Head of Investor Relations. Please go ahead.

Good morning, and welcome to Valley Fourth Quarter 2021 Earnings Conference Call. Presenting on behalf of Valley today are CEO, Ira Robbins; President, Tom Iadanza; and Chief Financial Officer, Mike Hagedorn. Before we begin, I would like to make everyone aware that our quarterly earnings release and supporting documents can be found on our company at valley.com. When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results. Please refer to today's earnings release for reconciliations of these non-GAAP measures. Additionally, I would like to highlight Slide 2 of our earnings presentation and remind you that comments made during this call may contain forward-looking statements relating to Valley National Bancorp and the banking industry. Valley encourages all participants to refer to our SEC filings, including those found on Form 8-K, 10-Q, and 10-K for a complete discussion of forward-looking statements. With that, I'll turn the call over to Ira Robbins.

Thank you, Travis. And welcome to those of you on the call. As usual, I will provide some big picture thoughts before I turn the call over to Mike to discuss this quarter's results in more detail. In the fourth quarter of 2021 Valley reported net income of $115 million, earnings per share was $0.27 and a return on average assets of 1.08%. Exclusive of merger charges, our EPS and ROA would have been $0.28 and 1.14%, respectively. These adjusted metrics include approximately $0.01 per share of after-tax provision associated with the non-PCD loans acquired from the Westchester Bank. We generated net income of $474 million and adjusted net income of $488 million in 2021. Adjusted net income was up nearly $86 million or 22% from 2020. These exceptional financial results reflect the execution of our strategic initiatives surrounding organic growth, credit preservation and positive operating leverage. We generated organic loan growth, exclusive of PPP and acquisitions of over 9% during the year. Growth was strong across our markets, reflecting contributions from both legacy Valley associates and new hires. Loan production was funded by low-cost core deposits, which continued to increase across geographies and business segments. Last quarter, I spoke about our ongoing evolution to a leading regional bank. While I won't rehash those comments, I want to reiterate that today's banking landscape offers tremendous opportunity for service-oriented bank like Valley. The recent acquisition of the Westchester Bank and the pending acquisition of Bank Leumi will enhance our competitive position and ability to capitalize on this opportunity. These partners will bring us new business capabilities and access to geographies that will enhance our competitive position and support our growth targets. By the end of 2022, Valley group will be well over $50 billion in assets with a high-quality core funded…

Thank you, Ira. Turning to Slide 6, you can see Valley's recent net interest income and margin trends with and without the impacts of PPP. During the quarter, net interest income increased $14 million or approximately 5%. This was primarily the result of strong organic loan originations throughout the year, $3 million of net interest income from Westchester and continued interest expense reductions. On a reported basis, net interest margin increased 8 basis points to 3.23%. Exclusive of PPP, the margin increased 3 basis points to 3.10%. Our margin has performed very well throughout the year despite the overhang of excess cash. We have actively driven down funding costs and are benefiting from strong organic loan growth throughout the year. Slide 7 illustrates the ongoing improvement in our funding base. Over the last few years, we have introduced new deposit niches and accelerated commercial deposit growth. This has reduced our reliance on higher-cost CDs and borrowings. This quarter, CDs and borrowings comprised 16% of total funding versus 29% a year ago. Meanwhile, noninterest-bearing deposits, including those assumed from Westchester, increased 8% from the third quarter and are up 27% from a year ago. During the quarter, our CD and nonmaturity deposit costs declined 7 basis points and 3 basis points, respectively. Our focus on low-cost core deposit generation has led to a significant reduction in funding costs and positions us well for potential rising rates as the year progresses. Slide 8 details our loan balances and the key drivers of our strong 2021 growth. Exclusive of over $900 million of commercial loans acquired from Westchester and adjusting for PPP runoff, organic growth was over 9% for the year. On an annualized basis, our organic growth was over 13% during the fourth quarter with contributions across our geographies and asset classes.…

Thanks, Mike. I am extremely proud of our 2021 financial results. It was an extremely busy year for our organization, and I am grateful for our team's hard work and commitment. We are really excited about the opportunities ahead of us in 2022 and believe it will be another great year for Valley. With that, I'd like to now turn the call back to the operator to begin Q&A. Thank you.

[Operator Instructions] Our first question comes from Michael Perito with KBW.

Mike, sorry if I missed this admittedly doing too much at once over here. But the rate assumptions behind the NII guide, do you mind just expanding on that a little bit for us?

Sure. Appreciate that question. I know this has been a topic on many calls with many of our competitors as well. Our guidance in the model is reflective as of 12/31, and it incorporates 25 basis points of Fed hikes occurring in May, September, and December. And as a reminder, we previously have disclosed this in our Qs and Ks, a 100-basis point shock increase would drive NII growth up 4.5% on a static balance sheet. And clearly, we won't have a static balance sheet in '22 with the loan growth that we're guiding to. But that will help you get a better feel for what we've actually baked in to our assumptions in '22.

Got it. So you have the 3 hikes in there. I guess the question is, as you kind of point this out, the balance sheet makeup. I mean when you kind of look to budgeting, I mean, what type of cash carryover do you guys assume? Or if you can't get that specific, just I mean, are you guys assuming some normalization of the cash being deployed? Or do you guys assume that it carries through conservatively for at least the first portion of the year here?

Yes. We do have some modest reduction in the cash in the early part of '22. I think the thing that you should keep in mind is that's more than likely the first place we would go if we're in a much more robust economy and we saw some deposit attrition. So the good news is we have that buffer to kind of first take the blow if in fact, we have that, which honestly, given the deposit sources that we built up over the year, including the amount of growth that we have seen in both business and checking accounts across the company in the last 2 years, mostly related to the way we use PPP to add new customers. I would expect that you would not see as much of a reduction, at least in the early rate increases as you might otherwise think.

Okay. That's helpful, Mike. And then just a couple more. On the expense side. So ex-Westchester, you guys were $172 million give or take, which was a little bit above the range you guys provided last quarter. I mean it seems like there's generally some industry-wide expense pressures upward. Curious if you could you have a few moving pieces. I know the efficiency guidance is excluding pending acquisition, but just curious if you could provide a little bit more near-term commentary about how some of those expense pressures could come through? And is it fair for us to assume that the $172 million probably has some upward pressure here as we move forward.

Yes, as you said, Mike, everybody in the industry, I think, is observing some upward pressure on overall expenses, not the least of which is related to wages. And so we're not immune from that as well. But as we said in our prepared remarks, and I'll say it again, we're cognizant of those pressures. They're the reality of the marketplace, but we still feel comfortable that we'll be able to manage our efficiency at or below 50%. And probably more importantly, it's worth noting that we are willing to accept some disciplined expense growth especially if it leads to us being able to strategically capitalize on some of the investments that we're making. And they don't always line up, right? The expenses oftentimes can lead some of the revenue growth. So we'll remain focused on that. But I think the guiding principle that you should hear from us today is we're comfortable with our overall efficiency ratio and generating positive operating leverage.

Got it. And then just lastly, maybe a question for Ira. Obviously, 2021, a couple of bank deals, you guys launched Valley Pay, growth in the cannabis sector. You grew down south, there's Dudley Ventures. There's quite a bit that you guys kind of brought into the fold. And just as we think at the onset of 2022 here, you kind of touched on this a little bit in your prepared remarks, but would just love what you think kind of the 2 or 3 maybe both significant growth opportunities are from a tactical standpoint that you think we should be mindful of as we begin the year here?

Yes. I think we've really established a wonderful foundation for us for 2022. There's been significant efforts over the last few years to really generate a strong foundation for organic growth and not just organic growth in the geographies that we've historically been in, but organic growth capitalizes on what we're seeing down in the south as well as some of the national platforms that we've been able to build. And I really believe that's going to take off in 2022. Additionally, I think the ability for us to execute and layer in the 2 acquisitions from a traditional bank perspective are going to be additive, having more quicker than what we would have anticipated. But on the periphery, when you look at something like Dudley Ventures as well, really the ability we have to incorporate that and provide a little bit of alternative fee income for us, I think, is going to provide benefits as well for 2022. So as I said on my prepared remarks, I couldn't be more excited about what we've built here moving forward and just really realizing what that looks like in 2022 should be exciting for all of us.

[Operator Instructions] Our next question comes from Steven Alexopoulos with JPMorgan.

I wanted to first follow up on the expense commentary because if we look at the guidance, 50% or lower implies it could go up or down from here. So I'm not sure exactly what you're saying. But it would be helpful. Can you give us a sense like expense growth with the inflationary pressure you cited? Is this a 5% year? Is it a 3% year? Can you give us some magnitude more from the expense growth side?

Well, I won't put a number on it. I will say this. If you look at the fourth quarter numbers, we generated 3% revenue growth against operating expense of approximately 4%. And so as I answered Michael's question earlier around positive operating leverage on a full year 2022 basis, we are still committed to positive operating leverage and an efficiency ratio that's below those numbers, albeit acknowledging that we do have noise in the numbers, right? 2 acquisitions closing in the fourth quarter combined with the impact of Leumi, which is much larger than those 2 previously closed or announced acquisitions.

Steven, this is Travis. I mean I would just say on that guidance slide. I mean we do give you kind of a range for NII growth, right? So that will help kind of drive your revenue growth assumption and then you can, I think, utilize the efficiency guidance that we gave you to kind of get a range for expenses.

Well, actually following up on the net interest income outlook. The 5% to 7% is below the loan outlook and you have some rate benefit built in because you just said that. So are you assuming deposits run off? Is that why the NII outlook is below the loan outlook?

No. Actually, Steven, this is Travis again. Just to be specific, right, we have $85 million of PPP income in 2021. We have about $12 million left of unearned fees in that category. So there's going to be a significant decline in PPP income. And then we fill that bucket with a full year of Westchester, the benefits of rising rates, the benefits of our balance sheet growth, the continued benefits of our interest expense save. So we do not have deposit runoff baked into the model.

No deposit run-off. Do you think, Travis, you can grow deposits next year, 2022?

Yes.

Okay. That's helpful. And then finally, Ira, for you, as you said, 2022 is the year you focus on execution, and you've obviously been active on the M&A front. Does this mean you don't plan to look at or pursue M&A transactions for 2022?

I will tell you, I think we have an incredible ability across our entire organization to really do both, as you saw, and I think Slide 4 when we talked about the benefits of what we did from 2016 on the organic basis versus on the acquired. So we've established a wonderful foundation here. I think there is tremendous opportunity, as I mentioned before, about what Bank Leumi offers us as well as what The Westchester Bank offers us, and we be remiss if we didn't focus on executing that and really leveraging that from a growth perspective, greater than what we had before. That said, I do think there's going to be tremendous opportunity when we think about what's happening with M&A and not just from a technology perspective but also from a consolidation. I don't want to distract anyone here internally, but there may be something on the periphery that makes sense for us. That really leverages what we're thinking about from a strategic plan perspective, but there's so much tremendous upside on just executing with the acquisitions we've done that. That's definitely going to be the primary focus for us.

Okay. And actually I lied if I could squeeze one more in. The cannabis business, how much growth did you guys have in the fourth quarter? Where do those deposit balances end the year?

I mean it's well over in the hundreds of millions of dollars as to where the cannabis business is today. I think the biggest opportunity there really is expanding some of the multistate operators. I think we're in 17 states right now with an ability to go up to 27. I think what we already have approved. We have over 40% of the current portfolio just in the pipeline as well. So it's an area of continued opportunity and growth for us. We did begin to get tip our toe into the lending business a bit at the end of the year, and I think there'll be opportunities for growth in that space as well. And even with the Valley Pay, I think, as you mentioned, it's a closed loop payment platform that really enables us to look at growth from a multitude of different perspectives, whether it be internally or even white labeling, there's a lot of opportunity for us. And it's that agility that we're trying to create throughout the entire organization from many of the initiatives that we're putting forth and once again, something we're very excited about.

And I'm showing no further questions in the queue. I'd like to turn the call back to Ira Robbins for closing remarks.

I just want to thank those of you that participated in our call today, and we're looking forward to 2022 and connecting with you again. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.