Valley National Bancorp Reports Increased Second Quarter Net Income and Strong Commercial Loan Growth

NEW YORK, July 25, 2019 (GLOBE NEWSWIRE) -- Valley National Bancorp (NASDAQ:VLY), the holding company for Valley National Bank, today reported net income for the second quarter of 2019 of $76.5 million, or $0.22 per diluted common share, as compared to the second quarter of 2018 earnings of $72.8 million, or $0.21 per diluted common share, and net income of $113.3 million, or $0.33 per diluted common share, for the first quarter of 2019. Excluding all non-core charges and income, our adjusted net income was $78.8 million, or $0.23 per diluted common share, for the second quarter of 2019, $75.2 million, or $0.22 per diluted common share, for the second quarter of 2018, and $74.9 million, or $0.22 per diluted common share, for the first quarter of 2019.  See further details below, including a reconciliation of our adjusted net income (a non-GAAP measure) in the "Consolidated Financial Highlights" tables.

Key financial highlights for the second quarter:

• Loan Portfolio: Loans increased $379.0 million, or 6.0 percent on an annualized basis, to approximately $25.8 billion at June 30, 2019 from March 31, 2019. The increase was largely due to strong organic loan growth within the commercial and industrial loan and commercial real estate loan categories.  Additionally, we sold approximately $223 million of residential mortgage loans resulting in total pre-tax gains of $3.9 million in the second quarter of 2019.
  
  
• Net Interest Income and Margin: Net interest income on a tax equivalent basis of $221.4 million for the second quarter of 2019 increased $1.5 million as compared to the first quarter of 2019. Our net interest margin on a tax equivalent basis of 2.96 percent for the second quarter of 2019 decreased by 2 basis points from 2.98 percent for the first quarter of 2019.  See the "Net Interest Income and Margin" section below for more details.
  
  
• Provision for Credit Losses: The provision for credit losses decreased $5.9 million to $2.1 million for the second quarter of 2019 as compared to $8.0 million for the first quarter of 2019.
  
  
• Credit Quality: Net loan charge-offs totaled $3.0 million for the second quarter of 2019 as compared to $5.3 million for the first quarter of 2019. Non-accrual loans represented 0.37 percent of total loans at both June 30, 2019 and March 31, 2019.
  
  
• Non-interest Income: Non-interest income decreased $80.1 million to $27.6 million for the second quarter of 2019 as compared to the first quarter of 2019 mainly due to a $78.5 million gain on the sale leaseback of 26 locations in the first quarter.  Additionally, we recognized net impairment losses on securities of $2.9 million related to one municipal bond (in default of its contractual payments) during the second quarter of 2019.
  
  
• Non-interest Expense: Non-interest expense decreased $6.1 million to $141.7 million for the second quarter of 2019 as compared to the first quarter of 2019.  Overall, non-interest expense declined largely as expected due to infrequent charges related to severance expense and other than temporary impairment of certain tax credit investments totaling $4.8 million and $2.4 million, respectively, recognized during the first quarter of 2019.
  
  
• Efficiency Ratio: Our efficiency ratio was 57.19 percent for the second quarter of 2019 as compared to 45.29 percent and 60.25 percent for the first quarter of 2019 and second quarter of 2018, respectively. Our adjusted efficiency ratio was 54.58 percent for the second quarter of 2019 as compared to 54.79 percent and 57.14 percent for the first quarter of 2019 and second quarter of 2018, respectively.
  
  
• Income Tax Expense: The effective tax rate was 26.5 percent for the second quarter of 2019 as compared to 33.5 percent for the first quarter of 2019. The first quarter of 2019 effective tax rate reflected an additional provision for income taxes of $12.1 million related to uncertain tax liability positions.  Our uncertain tax liabilities totaled $12.3 million at June 30, 2019 and relate to renewable energy tax credits and other tax benefits previously recognized from investments in the DC Solar funds. For the remainder of 2019, we currently estimate that our effective tax rate will range from 25 percent to 27 percent.
  
  
• Performance Ratios: Annualized return on average assets (ROA), shareholders’ equity (ROE) and tangible ROE were 0.94 percent, 8.79 percent, and 13.16 percent for the second quarter of 2019, respectively. Annualized ROA, ROE and tangible ROE, adjusted for non-core charges, was 0.96 percent, 9.05 percent, and 13.55 percent for the second quarter of 2019, respectively. See the "Consolidated Financial Highlights" tables below for additional information regarding our non-GAAP measures.

On June 26, 2019, Valley announced that it will acquire Oritani Financial Corp. (“Oritani”) and  its principal subsidiary, Oritani Bank, headquartered in Washington Township, New Jersey. The merger will double Valley's market share in demographically attractive Bergen County and enhance its presence in Hudson County. The transaction is expected to close in the fourth quarter of 2019.  The merger is subject to a number of pending conditions, including customary regulatory approvals and Valley and Oritani shareholder approvals.

Ira Robbins, CEO and President commented, "We are pleased with our second quarter core earnings and our continued progress towards achieving our long-term operating efficiency goals. During the quarter, we accomplished our loan growth target of six percent, net of mortgage sales, through a mix of new and existing client relationships within our markets. While the margin experienced some compression as compared to the first quarter of 2019, we believe our balance sheet is well positioned for the second half of 2019.  Additionally, we are very excited about our recently announced acquisition of Oritani and the strength it will add to our franchise.  Both Valley and Oritani employees have already commenced joint integration planning and together are working hard to build the synergies expected from the transaction."

Net Interest Income and Margin

Net interest income on a tax equivalent basis totaling $221.4 million for the second quarter of 2019 increased  $9.1 million as compared to the second quarter of 2018 and increased $1.5 million as compared to the first quarter of 2019. The increase as compared to the first quarter of 2019 was largely due to a combination of higher loan yield and average loan balances, partly offset by higher costs of deposits and  lower interest income from investment securities mainly caused by higher premium amortization and repayments of higher yielding securities. Interest income on a tax equivalent basis increased $7.4 million to $328.9 million for the second quarter of 2019 as compared to the first quarter of 2019 mainly due to an 8 basis point increase in yield on average loans and a $297.7 million increase in average loans. Interest expense of $107.5 million for the second quarter of 2019 increased $5.9 million as compared to the first quarter of 2019 largely due to higher costs for both money market and certificate of deposit accounts.

Our net interest margin on a tax equivalent basis of 2.96 percent for the second quarter of 2019 decreased by 15 basis points and 2 basis points from 3.11 percent and 2.98 percent for the second quarter of 2018 and first quarter of 2019, respectively, largely due to time deposits repricing at higher market rates in the early stages of the second quarter of 2019 and other increased funding costs. The yield on average interest earning assets increased by 5 basis points on a linked quarter basis mostly due to the increase in the yield on loans. The yield on average loans increased by 8 basis points to 4.65 percent for the second quarter of 2019 as compared to the first quarter of 2019 largely due to higher yield on new loan volumes, accretable  yield on PCI loans and a modest increase in loan prepayment penalties in the second quarter of 2019. The overall cost of average interest bearing liabilities increased 11 basis points to 1.93 percent for the second quarter of 2019 as compared to the linked first quarter of 2019 due to 11 and 6 basis point increases in the cost of average interest bearing deposits and long-term borrowings, respectively.  The increase in deposit costs was largely due to the aforementioned time deposits repricing in the second quarter of 2019.  The increase in the cost of long-term borrowings was mostly caused by the maturity of a few lower cost borrowings.  Our cost of total average deposits was 1.27 percent for the second quarter of 2019 as compared to 1.20 percent for the first quarter of 2019.

Branch Transformation and Sale-Leaseback

Approximately one year ago, we established the foundation of what the transformation of our branch network would look like in coming years.  At that time, we identified 74 branches that did not meet certain internal performance measures, including 20 branches that were closed and consolidated by the end of the first quarter of 2019. For the remaining 54 branches, we implemented tailored action plans focused on improving profitability and deposit levels, as well as upgrades in staffing and training, within a defined timeline.

We are pleased to announce that the majority of the 54 branches have seen measurable success in terms of relative cost of deposits, deposit mix and overall balance growth. However, some locations have not met our established performance targets.  As such, we expect to close approximately 10 branches by the end of the second quarter of 2020.

During March 2019, Valley closed a sale-leaseback transaction for 26 of its previously announced 29 properties to be sold.  Valley expects to close the sale of the remaining three properties, which remain subject to the buyer's due diligence, during the second half of 2019.  The sale of the remaining properties is expected to result in a pre-tax net gain of more than $3 million.

Loans, Deposits and Other Borrowings

Loans. Loans increased $379 million to approximately $25.8 billion at June 30, 2019 from March 31, 2019. The increase was mainly due to continued strong quarter over quarter organic growth in commercial and industrial loans and commercial real estate loans, as well as an increase in construction loan advances during the second quarter of 2019. During the second quarter of 2019, we originated $111 million of residential mortgage loans for sale rather than held for investment and sold approximately $116 million of pre-existing loans from our residential mortgage loan portfolio. Residential mortgage loans held for sale totaled $36.6 million and $31.9 million at June 30, 2019 and March 31, 2019, respectively.

Deposits. Total deposits decreased $133.6 million to approximately $24.8 billion at June 30, 2019 from March 31, 2019 largely due to a $339.1 million decrease in savings, NOW and money market deposits. Non-interest bearing deposits also decreased by $24.3 million to $6.3 billion at June 30, 2019 from March 31, 2019. Brokered deposits totaling $3.2 billion (consisting of both time and money market deposit accounts) at June 30, 2019 remained relatively unchanged from March 31, 2019. However, time deposits increased  $229.9 million to $7.3 billion at June 30, 2019 as compared to March 31, 2019 largely due to new retail customer balances resulted from our successful promotional campaigns in the early stages of the second quarter. Non-interest bearing deposits; savings, NOW, money market deposits; and time deposits represented approximately 26 percent, 45 percent and 29 percent of total deposits as of June 30, 2019, respectively.

Other Borrowings. Short-term borrowings and long-term borrowings increased $325.2 million and $300.5 million at June 30, 2019, respectively, as compared to March 31, 2019 largely due to new FHLB borrowings used for loan growth funding and additional liquidity purposes.

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 $3.8 billion, or 14.6 percent, of our total loan portfolio at June 30, 2019.

Total non-performing assets (NPAs), consisting of non-accrual loans, other real estate owned (OREO), other repossessed assets and non-accrual debt securities increased $3.4 million to $106.7 million at June 30, 2019 as compared to March 31, 2019 mainly due to increase of $3.1 million in non-accrual loans during the second quarter of 2019.  Non-accrual loans increased largely due to two new non-performing loans within the commercial real estate loan category at June 30, 2019. However, non-accrual loans represented 0.37 percent of total loans at June 30, 2019 which percentage remained unchanged as compared to March 31, 2019.

Total accruing past due loans (i.e., loans past due 30 days or more and still accruing interest) were $67 million, or 0.26 percent of total loans, at June 30, 2019 as compared to $82 million, or 0.32 percent of total loans, at March 31, 2019. The $15 million decrease from March 31, 2019 was mainly due to a decline  in loans 30 to 59 days past due.  The decrease in loans 30 to 59 days past due was mostly driven by better performance in the commercial real estate portfolio and the normal renewal of a $15.0 million matured performing loan reported in this delinquency category at March 31, 2019.

During the second quarter of 2019, we continued to closely monitor our New York City and Chicago taxi medallion loans totaling $113.2 million and $7.8 million, respectively, within the commercial and industrial loan portfolio at June 30, 2019. While most of the taxi medallion loans are currently performing, negative trends in market valuations of the underlying taxi medallion collateral could impact the future performance and internal classification of this portfolio. At June 30, 2019, the taxi medallion portfolio included impaired loans totaling $78.3 million with related reserves of $29.5 million within the allowance for loan losses as compared to impaired loans totaling $79.6 million with related reserves of $29.6 million at March 31, 2019. At June 30, 2019, the impaired taxi medallion loans largely consisted of $67.7 million of non-accrual loans and $10.6 million of performing troubled debt restructured (TDR) loans classified as substandard loans.

Additionally, Valley currently has $13.7 million of performing non-impaired taxi medallion loans which are scheduled to mature in 2019, and $14.0 million that mature between 2023 and 2028. If the loans with 2019 maturities became TDRs upon maturity and renewal, an additional reserve of $5.8 million would be required based on the allowance methodology at June 30, 2019.

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, 2019, March 31, 2019, and June 30, 2018:

Our loan portfolio, totaling $25.8 billion at June 30, 2019, had net loan charge-offs totaling $3.0 million for the second quarter of 2019 as compared to $5.3 million and $692 thousand for the first quarter of 2019 and second quarter of 2018, respectively.  Gross loan charge-offs related to taxi medallion loans within the commercial and industrial loan category were $2.3 million and $1.3 million for the second quarter of 2019 and first quarter of 2019, respectively.  There were no taxi medallion loan charge-offs during the second quarter of 2018.

During the second quarter of 2019, we recorded a $2.1 million provision for credit losses as compared to $8.0 million and $7.1 million for the first quarter of 2019 and the second quarter of 2018, respectively. The second quarter of 2019 provision was largely due to loan growth.  The provision declined as compared to the first quarter of 2019 partly due to a $1.6 million decrease in reserves for unfunded letters of credit (reported in the commercial and industrial loans category in the table above) and lower reserves for internally criticized loans, as well as moderate declines in the expected incurred losses in several loan categories.

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 0.61 percent, 0.63 percent and 0.62 percent at June 30, 2019, March 31, 2019 and June 30, 2018, respectively. At June 30, 2019, the allowance allocations for losses as a percentage of total loans remained relatively stable as compared to March 31, 2019 for most loan categories, however, allocation for commercial and industrial loans declined 0.09 percent partly due to the aforementioned decrease in the reserves for unfunded letters of credit.

Capital Adequacy

Valley's regulatory capital ratios continue to reflect its well capitalized position. Valley's total risk-based capital, Tier 1 capital, Tier 1 leverage capital, and common equity Tier 1 capital ratios were 11.39 percent, 9.43 percent, 7.62 percent and 8.59 percent, respectively, at June 30, 2019.

Investor Conference Call

Valley will host a conference call with investors and the financial community at 11:00 AM Eastern Daylight Time, today to discuss the second quarter of 2019 earnings. Those wishing to participate in the call may dial toll-free (866) 354-0432. The teleconference will also be webcast live: https://edge.media-server.com/m6/p/s4ncumwm [edge.media-server.com] and archived on Valley's website through Friday, August 23, 2019. Investor presentation materials will be made available prior to the conference call at www.valley.com.

About Valley

As the principal subsidiary of Valley National Bancorp, Valley National Bank is a regional bank with approximately $33 billion in assets. Valley is committed to giving people and businesses the power to succeed. Valley operates many convenient branch locations across New Jersey, New York, Florida and Alabama, and is committed to providing the most convenient service, the latest innovations and an experienced and knowledgeable team dedicated to meeting customer needs. Helping communities grow and prosper is the heart of Valley’s corporate citizenship philosophy. To learn more about Valley, go to www.valley.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:

• failure to obtain shareholder or regulatory approval for the acquisition of Oritani or to satisfy other conditions to the merger on the proposed terms and within the proposed timeframe;
• the inability to realize expected cost savings and synergies from the Oritani merger in amounts or in the timeframe anticipated;
• costs or difficulties relating to Oritani integration matters might be greater than expected;
• material adverse changes in Valley’s or Oritani’s operations or earnings;
• the inability to retain customers and qualified employees of Oritani;
• the inability to repay $635 million of higher cost FHLB borrowings in conjunction with the Oritani merger;
• developments in the DC Solar bankruptcy and federal investigations that could require the recognition of additional tax provision charges related to uncertain tax liability positions;
• due diligence issues or other matters prevent the expected sale and leaseback of three branch properties or expenses that reduce the additional pre-tax net gain expected to be recognized in the  second half of 2019;
• higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from changes in uncertain tax position liabilities, tax laws, regulations and case law;
• 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 inability to grow customer deposits to keep pace with loan growth;
• an increase in our allowance for credit losses due to higher than expected loan losses within one or more segments of our loan portfolio;
• less than expected cost savings from Valley's branch transformation strategy;
• greater than expected technology related costs due to, among other factors, prolonged or failed implementations, additional project staffing and obsolescence caused by continuous and rapid market innovations; 
• the loss of or decrease in lower-cost funding sources within our deposit base, including our inability to achieve deposit retention targets under Valley's branch transformation strategy;
• 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;
• 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 trademark infringement, employment related claims, and other matters;
• 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 earnings, regulatory restrictions or limitations, changes in our capital requirements or a decision to increase capital by retaining more earnings;
• 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, 2018.

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.

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