Valley National Bancorp Reports Increased Second Quarter Net Income And Strong Organic Loan Growth

WAYNE, N.J., July 26, 2018 /PRNewswire/ -- Valley National Bancorp (NYSE:VLY), the holding company for Valley National Bank, today reported net income for the second quarter of 2018 of $72.8 million, or $0.21 per diluted common share, as compared to the second quarter of 2017 earnings of $50.1 million, or $0.18 per diluted common share, and net income of $42.0 million, or $0.12 per diluted common share, for the first quarter of 2018.  Net income for second quarter of 2018 included merger charges of $3.2 million ($2.3 million after-tax) related to our acquisition of USAmeriBancorp, Inc. ("USAB") effective January 1, 2018. The first quarter of 2018 results also included infrequent charges of $26.0 million ($19.2 million after-tax) which mainly consisted of $13.5 million of USAB merger expenses and a $10.5 million increase in litigation reserves. Excluding these charges and other non-core items, our adjusted net income was $75.2 million, or $0.22 per diluted common share, for the second quarter of 2018, and $61.7 million, or $0.18 per diluted common share, for the first quarter of 2018. See further details below, including the "Consolidated Financial Highlights" tables.

Key financial highlights for the second quarter:

• Loan Portfolio: Loans increased $681.9 million, or 12.1 percent on an annualized basis, to approximately $23.2 billion at June 30, 2018 from March 31, 2018. The increase was largely due to solid organic loan growth within most loan categories. Additionally, we sold approximately $195 million of residential mortgage loans resulting in pre-tax gains of $7.6 million during the second quarter of 2018.

• Net Interest Income: Net interest income on a tax equivalent basis of $212.3 million for the second quarter of 2018 increased $3.1 million as compared to the first quarter of 2018 largely due to our new loan volumes and growth through the first six months of 2018.

• Provision for Credit Losses: The provision for credit losses declined $3.8 million to $7.1 million for the second quarter of 2018 as compared to the first quarter of 2018. For the second quarter of 2018, the level of the provision was mainly driven by the organic loan growth and a $3.3 million increase in reserves related to impaired taxi medallion loans at June 30, 2018.

• Credit Quality: Net loan charge-offs totaled only $692 thousand for the second quarter of 2018 as compared to net recoveries in the three consecutive prior quarters.  Net recoveries totaled $612 thousand for the six months ended June 30, 2018. Non-accrual loans represented 0.36 percent of total loans at June 30, 2018.

• Net Interest Margin: Our net interest margin on a tax equivalent basis of 3.11 percent for the second quarter of 2018 decreased by 2 basis points from 3.13 percent for the first quarter of 2018.  See the "Net Interest Income and Margin" section below for more details.

• Non-interest Income: Non-interest income increased $5.8 million, or 18.0 percent, to $38.1 million for the second quarter of 2018 as compared to the first quarter of 2018 largely due to increased fee income from derivative interest rate swaps executed with commercial loan customers and higher net gains on sales of loans.

• Non-interest Expense: Non-interest expense decreased $23.8 million, or 13.7 percent, to $149.9 million for the second quarter of 2018 as compared to the first quarter of 2018 primarily due to lower merger charges and litigation reserve related expenses.

• Performance Ratios: Annualized return on average assets (ROA), shareholders' equity (ROE) and tangible ROE were 0.98 percent, 8.88 percent and 13.76 percent for the second quarter of 2018, respectively. Annualized ROA, ROE and tangible ROE, adjusted for infrequent charges, was 1.01 percent, 9.17 percent and 14.21 percent for the second quarter of 2018, respectively.

• Efficiency Ratio: Our efficiency ratio was 60.25 percent for the second quarter of 2018 as compared to 72.44 percent and 61.57 percent for the first quarter of 2018 and second quarter of 2017, respectively. Excluding merger expense, amortization of tax credit investments and litigation reserve expense, if applicable, included in non-interest expense, our adjusted efficiency ratio was 57.15 percent for the second quarter of 2018 as compared to 60.23 percent and 57.58 percent for the first quarter of 2018 and second quarter of 2017, respectively. See the "Consolidated Financial Highlights" tables below for additional information regarding this non-GAAP measure.

• Income Tax Expense: The effective tax rate was 20.7 percent for the second quarter of 2018 as compared to 23.9 percent for the first quarter of 2018.  The decline in the effective tax rate was largely attributable to a $2 million charge included in income tax expense for the first quarter of 2018 related to effect of the USAB acquisition on our state deferred tax assets.  For the remainder of 2018, we currently estimate that our effective tax rate will range from 21 percent to 23 percent.

Ira Robbins, CEO and President commented, "We continue to make significant progress towards reshaping the future of Valley. Our many efforts to enhance growth at the Bank are taking hold and we are seeing greater traction in obtaining new clientele and talent alike. We successfully completed the USAB systems conversion during the quarter and fully integrated the USAmeriBank operations into Valley National Bank. I am proud of the incredible amount of progress that Valley and its employees have achieved over the past six months, and I look forward to what the future brings."

Net Interest Income and Margin

Net interest income on a tax equivalent basis totaling $212.3 million for the second quarter of 2018 increased $45.3 million and $3.1 million as compared to the second quarter of 2017 and first quarter of 2018, respectively.  The increase as compared to the second quarter of 2017 was largely due to the USAB acquisition effective January 1, 2018. Interest income on a tax equivalent basis increased $12.6 million to $281.6 million for the second quarter of 2018 as compared to the first quarter of 2018 mainly due to a $537.2 million increase in average loans and an 8 basis point increase in the yield on average loans. Interest expense of $69.4 million for the second quarter of 2018 increased $9.5 million as compared to the first quarter of 2018 largely due to higher interest rates on many of our interest bearing deposit products and short-term borrowings, as well as a $679.6 million increase in average short-term borrowings.

Our net interest margin on a tax equivalent basis of 3.11 percent for the second quarter of 2018 decreased by 1 basis point and 2 basis points from 3.12 percent and 3.13 percent for the second quarter of 2017 and first quarter of 2018, respectively.  The yield on average interest earning assets increased by 11 basis points on a linked quarter basis mostly due to higher yields on both average loans and taxable investments, as well as one more day during the second quarter of 2018. The yield on average loans increased by 8 basis points to 4.34 percent for the second quarter of 2018 as compared to the first quarter of 2018 due to the high volume of new loan originations at current market rates. The yield on average taxable securities increased 28 basis points to 3.02 percent for the second quarter of 2018 as compared to the first quarter of 2018.  The overall cost of average interest bearing liabilities increased 16 basis points to 1.38 percent for the second quarter of 2018 as compared to the linked first quarter of 2018 due to 12 and 47 basis point increases in the cost of average interest bearing deposits and short-term borrowings, respectively, largely driven by higher market interest rates. Our cost of total average deposits was 0.76 percent for the second quarter of 2018 as compared to 0.68 percent for the first quarter of 2018.

Branch Transformation

Over the past six months, Valley has embarked on a strategy to overhaul its retail network. The Bank is striving to create a branch infrastructure that is more reflective of current and future activity within our target markets. Our new model is going to place greater emphasis on service, sales, advisory and efficiency. We are in the process of upgrading many staff and training components, as well as placing greater importance on mobile and digital implementation and customer education and encouragement of those products. Valley's branch transformation will also include the repositioning, re-branding, functionality, aesthetics, and in many cases, reducing the square footage of our branches.

With that, we have updated our internal branch profitability and growth requirements, initially analyzing our New Jersey and New York network. We have identified 74 branches out of 177 within NJ and NY that presently do not meet our minimum hurdles for success. Of the 74 identified we expect to consolidate about 20 branches by the end of the first quarter 2019, resulting in an approximate estimated annual operating expense savings of $9 million.

For the remaining 54 branches, we are implementing tailored action plans focused on improving profitability and deposit levels as well as upgrades in staffing and training, within a defined timeline. Should the remaining branches not experience improvement within the associated timeline, they will be reviewed for potential consolidation as well.

While we expect the consolidation process, repositioning and renovations to be mostly complete by the end of 2020, it is important to recognize the evolving retail banking landscape combined with the Bank's renewed expectation regarding profitability will make this activity a more permanent piece of Valley's strategy.

Loans, Deposits and Other Borrowings

Loans. Loans increased $681.9 million to approximately $23.2 billion at June 30, 2018 from March 31, 2018. The increase was mainly due to strong quarter over quarter organic growth in total commercial real estate loans, commercial and industrial loans and residential mortgage loans.  During the second quarter of 2018, Valley also originated $219 million of residential mortgage loans for sale rather than held for investment.  Residential mortgage loans held for sale totaled $32.7 million and $15.1 million at June 30, 2018 and March 31, 2018, respectively.

Deposits. Total deposits decreased $319.1 million to approximately $21.6 billion at June 30, 2018 from March 31, 2018 largely due to decreases in NOW and money market deposits partially caused by normal fluctuations in municipal and other escrow accounts.  Additionally, time deposits decreased $104.4 million due to maturities and strong competition for such deposits in our primary markets.  Valley implemented several new deposit gathering campaigns and strategies in the later part of the second quarter of 2018 and July 2018 to better position its deposit offerings for both consumers and businesses. Non-interest bearing deposits; savings, NOW, money market deposits; and time deposits represented approximately 29 percent, 50 percent and 21 percent of total deposits as of June 30, 2018, respectively.

Other Borrowings. Short-term borrowings increased $1.3 billion to approximately $2.9 billion at June 30, 2018 as compared to March 31, 2018 largely due to new FHLB advances used for normal loan funding activity and liquidity purposes during the second quarter of 2018. Long-term borrowings decreased  $249.6 million to $2.1 billion at June 30, 2018 as compared to March 31, 2018 mostly due to maturities of FHLB advances and a partial shift in funding to shorter term borrowings.

Credit Quality

Non-Performing Assets. Our past due loans and non-accrual loans discussed further below exclude PCI loans. Under U.S. GAAP, the PCI loans (acquired at a discount that is due, in part, to credit quality) are accounted for on a pool basis and are not subject to delinquency classification in the same manner as loans originated by Valley. Our PCI loan portfolio totaled $4.6 billion, or 20.0 percent, of our total loan portfolio at June 30, 2018 and included all of the loans acquired from USAB on January 1, 2018.

Total non-performing assets (NPAs), consisting of non-accrual loans, other real estate owned (OREO) and other repossessed assets increased $22.1 million to $97.1 million at June 30, 2018 as compared to March 31, 2018 mainly due to an increase of $24.1 million in non-accrual loans, partially offset by a $2.0 million decline in OREO during the second quarter of 2018. The increase in non-accrual loans was primarily related to taxi medallion loans totaling $31.1 million (See further discussion of our taxi medallion lending below).  As a result, non-accrual loans increased to 0.36 percent of total loans at June 30, 2018 as compared to 0.27 percent of total loans at March 31, 2018.

Total accruing past due loans (i.e., loans past due 30 days or more and still accruing interest) were $33.3 million, or 0.14 percent of total loans, at June 30, 2018 and remained relatively unchanged as compared to $33.2 million, or 0.15 percent of total loans, at March 31, 2018.

During the second quarter of 2018, we continued to closely monitor our NYC and Chicago taxi medallion loans totaling $125.9 million and $9.0 million, respectively, within the commercial and industrial loan portfolio at June 30, 2018.  While the vast majority of the taxi medallion loans are currently performing, negative trends in the market valuations of the underlying taxi medallion collateral could impact the future performance and internal classification of this portfolio.  At June 30, 2018, the medallion portfolio included impaired loans totaling $64.7 million with related reserves of $23.2 million within the allowance for loan losses as compared to impaired loans totaling $65.0 million with related reserves of $19.9 million at March 31, 2018. At June 30, 2018, the impaired medallion loans largely consisted of performing troubled debt restructured (TDR) loans classified as substandard loans, as well as $44.7 million of non-accrual taxi cab medallion loans classified as doubtful.   Our non-accrual taxi medallion loans increased from $13.9 million at March 31, 2018 primarily due to weakened levels of cash flow, collateral and guarantor support in relation to several previously impaired TDR loans, and not due to actual loan performance.

Allowance for Credit Losses. The following table summarizes the allocation of the allowance for credit losses to specific loan categories and the allocation as a percentage of each loan category (including PCI loans) at June 30, 2018, March 31, 2018, and June 30, 2017:

Our loan portfolio, totaling $23.2 billion at June 30, 2018, had net loan charge-offs totaling $692 thousand for the second quarter of 2018 as compared to net charge-offs of $2.7 million for the second quarter of 2017 and $1.3 million of net recoveries of loan charge-offs during the first quarter of 2018.

During the second quarter of 2018, we recorded a $7.1 million provision for credit losses as compared to $10.9 million and $3.6 million for the first quarter of 2018 and the second quarter of 2017, respectively. The elevated provision during the first half of 2018 was mainly due to higher specific reserves allocated to impaired taxi medallion loans, as well as organic loan growth.

The allowance for credit losses, comprised of our allowance for loan losses and reserve for unfunded letters of credit, as a percentage of total loans was 0.62 percent, 0.61 percent and 0.67 percent at June 30, 2018, March 31, 2018 and June 30, 2017, respectively.  At June 30, 2018, our allowance allocations for losses as a percentage of total loans remained relatively unchanged as compared to March 31, 2018 for most loan categories, except for commercial and industrial loans which increased 0.11 percent largely due to higher specific reserves for impaired taxi medallion loans and, to a much lesser extent, internally classified loans.

Our allowance for credit losses as a percentage of total non-PCI loans (excluding PCI loans with carrying values totaling approximately $4.6 billion) was 0.77 percent, 0.78 percent and 0.73 percent at June 30, 2018, March 31, 2018 and June 30, 2017, respectively. PCI loans are accounted for on a pool basis and initially recorded net of fair valuation discounts related to credit which may be used to absorb future losses on such loans before any allowance for loan losses is recognized subsequent to acquisition.  Due to the adequacy of such discounts, there were no allowance reserves related to PCI loans at June 30, 2018, March 31, 2018 and June 30, 2017.

Capital Adequacy

Valley's regulatory capital ratios continue to reflect its strong capital position. Valley's total risk-based capital, Tier 1 capital, Tier 1 leverage capital, and common equity Tier 1 capital ratios were 11.77 percent, 9.65 percent, 7.72 percent and 8.71 percent, respectively, at June 30, 2018.

Investor Conference Call

Valley will host a conference call with investors and the financial community at 11:00 AM Eastern Standard Time, today to discuss the second quarter 2018 earnings.  Those wishing to participate in the call may dial toll-free (800) 230-1059.  Investor presentation materials will be made available prior to the conference call at www.valleynationalbank.com.

About Valley

Valley National Bancorp is a regional bank holding company headquartered in Wayne, New Jersey with approximately $30 billion in assets. Its principal subsidiary, Valley National Bank, currently operates over 230 branch locations in northern and central New Jersey, the New York City boroughs of Manhattan, Brooklyn, Queens and Long Island, Florida and Alabama. Valley National Bank is one of the largest commercial banks headquartered in New Jersey and is committed to providing the most convenient service, the latest in product innovations and an experienced and knowledgeable staff with a high priority on friendly customer service. For more information about Valley National Bank and its products and services, please visit www.valleynationalbank.com or call our Customer Service Center at 800-522-4100.

Forward Looking Statements

The foregoing contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Such statements are not historical facts and include expressions about management's confidence and strategies and management's expectations about new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations. These statements may be identified by such forward-looking terminology as "should," "expect," "believe," "view," "opportunity," "allow," "continues," "reflects," "typically," "usually," "anticipate," or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties. Actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to:

• weakness or a decline in the economy, mainly in New Jersey, New York, Florida and Alabama, as well as an unexpected decline in commercial real estate values within our market areas;
• the diversion of management's time on any remaining issues related to the USAB merger integration;
• the inability to realize expected cost savings and synergies from the merger of USAB with Valley in the amounts or in the timeframe anticipated;
• the inability to retain USAB's customers and employees;
• less than expected cost reductions and revenue enhancement from Valley's cost reduction plans including its earnings enhancement program called "LIFT";
• higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from the impact of the Tax Cuts and Jobs Act and other changes in tax laws, regulations and case law;
• damage verdicts or settlements or restrictions related to existing or potential litigations arising from claims of breach of fiduciary responsibility, negligence, fraud, contractual claims, environmental laws, patent or trade mark infringement, employment related claims, and other matters;
• the loss of or decrease in lower-cost funding sources within our deposit base may adversely impact our net interest income and net income;
• cyber attacks, computer viruses or other malware that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems;
• results of examinations by the OCC, the FRB, the CFPB and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for credit losses, write-down assets, reimburse customers, change the way we do business, or limit or eliminate certain other banking activities;
• changes in accounting policies or accounting standards, including the new authoritative accounting guidance (known as the current expected credit loss (CECL) model) which may increase the required level of our allowance for credit losses after adoption on January 1, 2020;
• our inability or determination not to pay dividends at current levels, or at all, because of inadequate future earnings, regulatory restrictions or limitations, changes in our capital requirements or a decision to increase capital by retaining more earnings;
• higher than expected loan losses within one or more segments of our loan portfolio;
• unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather or other external events;
• unexpected significant declines in the loan portfolio due to the lack of economic expansion, increased competition, large prepayments, changes in regulatory lending guidance or other factors; and
• the failure of other financial institutions with whom we have trading, clearing, counterparty and other financial relationships.

A detailed discussion of factors that could affect our results is included in our SEC filings, including the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2017.

We undertake no duty to update any forward-looking statement to conform the statement to actual results or changes in our expectations.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

 

 

SOURCE Valley National Bank

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