Valley National Bancorp Reports First Quarter 2020 Net Income, Strong Loan Growth and Net Interest Margin

NEW YORK, April 30, 2020 (GLOBE NEWSWIRE) -- Valley National Bancorp VLY, the holding company for Valley National Bank, today reported net income for the first quarter 2020 of $87.3 million, or $0.21 per diluted common share, as compared to the first quarter 2019 earnings of $113.3 million, or $0.33 per diluted common share, and net income of $38.1 million, or $0.10 per diluted common share, for the fourth quarter 2019. Excluding all non-core charges, our adjusted net income was $88.2 million, or $0.21 per diluted common share, for the first quarter 2020, $74.9 million, or $0.22 per diluted common share, for the first quarter 2019, and $90.7 million, or $0.24 per diluted common share, for the fourth quarter 2019. See further details below, including a reconciliation of our adjusted net income (a non-GAAP measure) in the "Consolidated Financial Highlights" tables.

Valley adopted the Current Expected Credit Loss ("CECL") accounting standard effective January 1, 2020 and recorded in first quarter 2020 a provision for credit losses of $34.7 million pre-tax, or $0.06 per share after-tax, including a reserve build under CECL of $29.9 million, or $0.05 per share after-tax, largely tied to COVID-19 impacts and loan growth.

Ira Robbins, CEO and President commented, "During these uncertain and challenging times, I am pleased to say that Valley remains one of the strongest and most reliable banks in the country, and we are more focused than ever before on serving the needs of our customers, associates and communities."  Robbins continued, "In response to the COVID-19 pandemic, we have spent many tireless weeks supporting the implementation of the CARES Act and providing special assistance for customers. We are also actively providing additional support for our associates, including a special cash bonus to all hourly associates. I'm extremely proud of the commitment, flexibility and drive that our team has demonstrated to make a difference for our customers and communities. We are deeply committed to being a trusted partner and solution provider for our customers."

Valley is offering special financial assistance to support customers who are experiencing financial hardships related to the COVID-19 pandemic. Through April 26, 2020, Valley has processed approximately 3,600 consumer payment deferral requests, including approximately 750 related to residential mortgage loans. In addition, Valley has processed requests for approximately 1,100 mortgage loans serviced for others. From a commercial customer perspective, Valley has processed approximately 2,600 payment deferral requests. Valley is also a certified SBA lender and has dedicated significant additional staff and other resources to help our customers complete and submit their applications and supporting documentation for loans offered under the new Paycheck Protection Program, obtain SBA approval and receive funding as quickly as possible. Through the initial loan submission period ending on April 16, 2020, Valley facilitated $1.6 billion in assistance to its customers through this program.

Key financial highlights for the first quarter:

• Loan Portfolio: Loans increased $728.9 million, or 9.8 percent on an annualized basis, to approximately $30.4 billion at March 31, 2020 from December 31, 2019. The increase was largely due to strong organic loan growth within the commercial real estate, commercial and industrial and residential loan categories. Additionally, we sold approximately $196 million of residential mortgage loans, including $30 million of pre-existing loans sold from our residential mortgage loan portfolio resulting in total pre-tax gains of $4.6 million in the first quarter 2020.
• Net Interest Income and Margin: Net interest income on a tax equivalent basis of $266.4 million for the first quarter 2020 increased $26.8 million as compared to the fourth quarter 2019 largely due to a decline in our funding costs, a full quarter of margin results including our acquisition of Oritani Financial Corp. on December 1, 2019 and higher loan discount accretion partially caused by increased repayments. Our net interest margin on a tax equivalent basis of 3.07 percent for the first quarter 2020 increased by 11 basis points from 2.96 percent for the fourth quarter 2019. See the "Net Interest Income and Margin" section below for more details.
• Provision for Credit Losses: During the first quarter 2020, the provision for credit losses for loans was $33.9 million.  Approximately 50 percent of the provision reflects the adverse economic conditions impacting Valley's economic forecast, including uncertainty regarding the benefits of government stimulus enacted, since the initial CECL adoption.  The remainder of the first quarter 2020 provision for credit losses for loans was primarily driven by loan growth and higher specific reserves associated with our taxi medallion loan portfolio.  Additionally, Valley recorded a $759 thousand provision for credit losses for held to maturity debt securities during the first quarter 2020.
• Credit Quality: Net loan charge-offs totaled $4.8 million for the first quarter 2020 as compared to $5.6 million for the fourth quarter 2019. Non-accrual loans represented 0.68 percent and 0.31 percent of total loans at March 31, 2020 and December 31, 2019, respectively.  The increase in non-accrual loans reported at March 31, 2020 was largely related to non-performing purchased credit-impaired (PCI) loans which are now required to be reported as delinquent loans under the CECL accounting guidance effective January 1, 2020.  See the "Credit Quality" Section below for more details.
• Non-interest Income: Non-interest income increased $3.3 million to $41.4 million for the first quarter 2020 as compared to the fourth quarter 2019 mainly due to an increase of $4.2 million in swap fee income from commercial loan customer transactions.  Swap fee income totaled $14.2 million and $10.0 million within other income for the first quarter 2020 and fourth quarter 2019, respectively.
• Non-interest Expense: Non-interest expense decreased $40.5 million to $155.7 million for the first quarter 2020 as compared to the fourth quarter 2019 mainly due to the $32.0 million loss on extinguishment of debt recognized during the fourth quarter 2019 and a decline in Oritani merger related expenses.  Merger related expenses totaled $1.3 million and $15.1 million for the first quarter 2020 and fourth quarter 2019, respectively. The first quarter 2020 also included approximately $2.1 million of COVID-19 related expenses that largely consisted of the cash bonus accrual for hourly employees.
• Efficiency Ratio: Our efficiency ratio was 50.75 percent for the first quarter 2020 as compared to 70.90 percent and 45.29 percent for the fourth quarter 2019 and first quarter 2019, respectively. Our adjusted efficiency ratio was 49.26 percent for the first quarter 2020 as compared to 52.43 percent and 54.79 percent for the fourth quarter 2019 and first quarter 2019, respectively. See the "Consolidated Financial Highlights" tables below for additional information regarding our non-GAAP measures.
• Income Tax Expense: The effective tax rate was 25.0 percent for the first quarter 2020 as compared to 49.2 percent for the fourth quarter 2019.  The decrease was mainly due to an $18.7 million provision for income taxes related to uncertain tax liability positions during the fourth quarter 2019.
• Performance Ratios: Annualized return on average assets (ROA), average shareholders' equity (ROE) and average tangible shareholders' equity (ROTE) were 0.92 percent, 7.92 percent, and 11.84 percent for the first quarter 2020, respectively.  Annualized ROA, ROE and ROTE, adjusted for non-core charges, was 0.93 percent, 8.01 percent, and 11.97 percent for the first quarter 2020, respectively. See the "Consolidated Financial Highlights" tables below for additional information regarding our non-GAAP measures.

Net Interest Income and Margin

Net interest income on a tax equivalent basis totaling $266.4 million for the first quarter 2020 increased $46.5 million as compared to the first quarter 2019 and increased $26.8 million as compared to the fourth quarter 2019. The increase as compared to the fourth quarter 2019 was largely due to higher average loan balances and lower costs of interest-bearing liabilities, partly offset by lower yielding loans.  Interest income on a tax equivalent basis increased $20.0 million to $364.8 million for the first quarter 2020 as compared to the fourth quarter 2019 mainly due to a $2.0 billion increase in average loans and higher loan discount accretion partially caused by repayments. Interest expense of $98.5 million for the first quarter 2020 decreased $6.8 million as compared to the fourth quarter 2019 largely due to the overall lower cost of funds, partially offset by the interest cost associated with higher average balances of interest-bearing deposits and long-term borrowings.  In December 2019, we prepaid $635.0 million of long-term FHLB advances with a combined weighted average interest rate of 3.93 percent.

Our net interest margin on a tax equivalent basis of 3.07 percent for the first quarter 2020 increased by 9 basis points and 11 basis points from 2.98 percent and 2.96 percent for the first quarter 2019 and fourth quarter 2019, respectively. The yield on average interest earning assets decreased by 6 basis points on a linked quarter basis mostly due to a decrease in the yield on loans. The yield on average loans decreased by 7 basis points to 4.44 percent for the first quarter 2020 as compared to the fourth quarter 2019 largely due to the repayment of higher yielding loans, partly offset by a $7.7 million increase in loan discount accretion in the first quarter 2020. The overall cost of average interest bearing liabilities decreased 24 basis points to 1.50 percent for the first quarter 2020 as compared to the linked fourth quarter 2019 due to both deposits and borrowings continuing to reprice at lower interest rates and the prepayment of the $635 million high cost FHLB advances in December 2019. Our cost of total average deposits was 1.07 percent for the first quarter 2020 as compared to 1.20 percent for the fourth quarter 2019.

Loans, Deposits and Other Borrowings

Loans. Loans increased $728.9 million to approximately $30.4 billion at March 31, 2020 from December 31, 2019. The increase was mainly due to continued strong quarter over quarter organic growth in commercial real estate and commercial and industrial loans, as well as stronger residential loan volumes during the first quarter 2020. During the first quarter 2020, we originated $148 million of residential mortgage loans for sale rather than held for investment and sold approximately $196 million, including $30 million pre-existing loans, from our residential mortgage loan portfolio. Residential mortgage loans held for sale totaled $58.9 million and $76.1 million at March 31, 2020 and December 31, 2019, respectively.

Deposits. Total deposits decreased $168.8 million to approximately $29.0 billion at March 31, 2020 from December 31, 2019 largely due to a $1.2 billion net decrease in time deposits.  The decline in time deposits was mostly driven by an $825 million decrease in brokered CDs due to maturities during the first quarter and lower use of such deposits in our liquidity and loan funding management at March 31, 2020.  Savings, NOW and money market deposits and non-interest bearing deposits increased by $741.3 million and $240.7 million at March 31, 2020 from December 31, 2019, respectively. These increases were due to higher depositor balances most likely driven by the uncertainty in the financial markets, as well as a partial shift to more liquid funds for maturing retail CD customers. Total brokered deposits (consisting of both time and money market deposit accounts) were $3.4 billion at March 31, 2020 as compared to $4.1 billion at December 31, 2019. Non-interest bearing deposits; savings, NOW and money market deposits; and time deposits represented approximately 24 percent, 47 percent and 29 percent of total deposits as of March 31, 2020, respectively.

Other Borrowings. Short-term borrowings and long-term borrowings increased by $1.0 billion and $683.2 million, to $2.1 billion and $2.8 billion, respectively at March 31, 2020 as compared to December 31, 2019.  The increase in both short- and long-term borrowings was primarily driven by our  plan to increase our liquidity levels as an abundance of caution in the face of the escalating economic crisis created by the COVID-19 pandemic. As of March 31, 2020, the short-term borrowings mainly consisted of FHLB advances totaling $1.5 billion with weighted interest rates well below 1.0 percent and federal funds purchased totaling $457 million with a weighted average rate of 0.17 percent. Of the $1.5 billion in FHLB advances, $600 million were hedged with cash flow interest rate swaps as part of our interest rate risk management strategies during the first quarter 2020. In addition, during the first quarter 2020 Valley obtained $723 million of new long-term FHLB advances with maturities between three and five years at a combined weighted average rate of approximately 1.89 percent.

Credit Quality

Non-Performing Assets. Prior to our adoption of the CECL standard on January 1, 2020, our past due loans and non-accrual loans discussed further below excluded purchased credit-impaired (PCI) loans. Under previous U.S. GAAP, the PCI loans (acquired at a discount that is due, in part, to credit quality) were accounted for on a pool basis and not subject to delinquency classification in the same manner as loans originated by Valley. Under the new CECL standard, Valley's PCI loan pools are accounted for as purchased credit deteriorated (PCD) loans on a loan level basis and, if applicable, reported in our past due and non-accrual loans at March 31, 2020.

Total non-performing assets (NPAs), consisting of non-accrual loans, other real estate owned (OREO), other repossessed assets and non-accrual debt securities increased $116.1 million to $220.5 million at March 31, 2020 as compared to December 31, 2019 largely due to an increase in non-accrual loans.  Non-accrual loans increased $112.9 million to $205.9 million at March 31, 2020 as compared to December 31, 2019 largely due to non-accrual PCD loans totaling approximately $74.4 million being added to this category. The remaining increase was largely due to additional taxi medallion loans within the commercial and industrial category.  Non-accrual loans represented 0.68 percent of total loans at March 31, 2020.

Total accruing past due loans (i.e., loans past due 30 days or more and still accruing interest) increased  $91.2 million to $159.4 million, or 0.52 percent of total loans, at March 31, 2020 as compared to $68.2 million, or 0.23 percent of total loans, at December 31, 2019 largely due to an increase in early stage delinquencies in most loan categories.  The increase was partly due to a few large commercial real estate loans, an uptick in residential mortgage delinquencies and PCD loans past due totaling approximately $18.2 million at March 31, 2020 being added to this category. Valley has worked with borrowers impacted by COVID-19 on forbearance, and as of April 26, 2020 had approximately 6,200 consumers and commercial borrowers in forbearance.  Valley will continue to work with customers seeking flexibility on loan terms and conditions due to the pandemic in accordance with prudent banking principles and bank regulatory guidance. In addition, Valley was proactive in securing financing through the SBA Paycheck Protection Program for its small business customers.

During the first quarter 2020, we continued to closely monitor our New York City and Chicago taxi medallion loans totaling $102.8 million and $7.0 million, respectively, within the commercial and industrial loan portfolio at March 31, 2020.  Due to continued negative trends in market valuations of the underlying taxi medallion collateral, a weak operating environment and uncertain borrower performance, the remainder of our previously accruing taxi medallion loans were placed on non-accrual status during the first quarter 2020. At March 31, 2020, the non-accrual taxi medallion loans totaling $109.8 million had related reserves of $56.8 million within the allowance for loan losses.

CECL Adoption. Valley adopted the CECL accounting standard effective January 1, 2020 and recorded an $100.4 million increase to its allowance for credit losses, including reserves of $61.6 million related to PCD loans.  For PCD loans, the allowance for credit losses recorded is recognized through a gross-up that increases the amortized cost basis of loans with a corresponding increase to the allowance for credit losses, and therefore results in no impact to shareholders' equity.  The remaining increase to the allowance for credit losses of $38.8 million is offset in shareholders' equity and deferred tax assets.

For regulatory capital purposes, in connection with the Federal Reserve Board's final interim rule as of April 3, 2020, 100 percent of the CECL Day 1 impact to shareholders' equity equaling $28.2 million after-tax will be deferred over a two-year period ending January 1, 2022, at which time it will be phased in on a pro-rata basis over a three-year period ending January 1, 2025. Additionally, 25 percent of the first quarter 2020 reserve build (i.e., provision for credit losses less net charge-offs) will be phased in over the same time frame.  See the "Capital Adequacy" section below for more information regarding our capital ratios.

Allowance for Credit Losses for Loans and Unfunded Commitments. The following table summarizes the allocation of the allowance for credit losses to loan categories and the allocation as a percentage of each loan category at March 31, 2020, December 31, 2019, and March 31, 2019:

Our loan portfolio, totaling $30.4 billion at March 31, 2020, had net loan charge-offs totaling $4.8 million for the first quarter 2020 as compared to $5.6 million and $5.3 million for the fourth quarter 2019 and first quarter 2019, respectively.  Gross loan charge-offs related to taxi medallion loans totaled $1.3 million, $2.9 million and $1.3 million for the first quarter 2020, fourth quarter 2019 and first quarter 2019, respectively.

During the first quarter 2020, we recorded a $33.9 million provision for credit losses for loans as compared to $5.4 million and $8.0 million for the fourth quarter 2019 and the first quarter 2019, respectively. The increase in the first quarter 2020 provision as compared to the fourth quarter 2019 was mainly due to higher reserves recorded under CECL due to forecasted credit deterioration due to the impact of the COVID-19 pandemic and loan growth, as well as higher specific reserves for non-accrual taxi medallion loans.

The allowance for credit losses for loans, comprised of our allowance for loan losses and unfunded credit commitments, as a percentage of total loans was 0.96 percent, 0.55 percent and 0.63 percent at March 31, 2020, December 31, 2019 and March 31, 2019, respectively. The increase at March 31, 2020 was largely due to the reserves related to PCD loans included in the Day 1 CECL adoption adjustment to the allowance for credit losses for loans and the reserve build under CECL during the first quarter 2020 related to the impact of COVID-19.

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 11.53 percent, 9.95 percent, 8.24 percent and 9.24 percent, respectively, at March 31, 2020. Valley's capital ratios at March 31, 2020 reflect the five-year transition provision to delay recognition of the full impact of the CECL Day 1 shareholders' equity adjustment and 25 percent of the first quarter reserve build under CECL for two years, followed by a three-year transition period.

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 first quarter 2020 earnings. Those wishing to participate in the call may dial toll-free (866) 354-0432 Conference ID: 7135108. The teleconference will also be webcast live: https://edge.media-server.com/mmc/p/qajw8rkk [edge.media-server.com] and archived on Valley's website through Friday, May 29, 2020. 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 $39 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, including the potential effects of the COVID-19 pandemic on our businesses and financial results and conditions. 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:

• the impact of COVID-19 on the U.S. and the global economies, including business disruptions, reductions in employment and an increase in business failures, specifically among our clients;
• the impact of COVID-19 on our employees and our ability to provide services to our clients and respond to their needs;
• potential judgments, claims, damages, penalties, fines and reputational damage resulting from pending or future litigation and regulatory and government actions, including as a result of our participation in and execution of government programs related to the COVID-19 pandemic or as a result of our action, or failure to implement or effectively implement, federal, state and local laws, rules or executive orders requiring that we grant forbearances or not act to collect our loans;
• the impact of forbearances or deferrals we are required or agree to as a result of customer requests and/or government actions, including, but not limited to our potential inability to recover fully deferred payments from the borrower or the collateral;
• damage verdicts or settlements or restrictions related to existing or potential class action litigation or individual litigation arising from claims of violations of laws or regulations, contractual claims, breach of fiduciary responsibility, negligence, fraud, environmental laws, patent or trademark infringement, employment related claims, and other matters;
• a prolonged downturn 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 realize expected cost savings and synergies from the Oritani merger in amounts or in the timeframe anticipated;
• the inability to retain Oritani customers;
• 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;
• the inability to grow customer deposits to keep pace with loan growth;
• a material change in our allowance for credit losses under CECL due to forecasted economic conditions and/or unexpected credit deterioration in our loan and investment portfolios;
• the need to supplement debt or equity capital to maintain or exceed internal capital thresholds;
• 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;
• 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, the COVID-19 pandemic 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, 2019.

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.

-Tables to Follow-

VALLEY NATIONAL BANCORP
CONSOLIDATED FINANCIAL HIGHLIGHTS

SELECTED FINANCIAL DATA

NOTES TO SELECTED FINANCIAL DATA

(1)           Interest income is presented on a tax equivalent basis using a 21 percent federal tax rate.
(2)           Loans are stated net of unearned income and include non-accrual loans.
(3)           The yield for securities that are classified as available for sale is based on the average historical amortized cost.
(4)           Includes junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of condition.
(5)           Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.
(6)           Net interest income as a percentage of total average interest earning assets.