Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Valley National Bancorp (VLY, Financial) reported net income of $70 million and diluted earnings per share of $0.13 for the second quarter of 2024.
- The company made significant progress in reducing its commercial real estate (CRE) concentration ratio to its full-year 2024 target of around 40%.
- Valley National Bancorp (VLY) achieved a reserve coverage ratio of above 1%, with expectations to reach around 1.10% by the end of 2024.
- The company's risk-based capital ratios improved meaningfully during the quarter, driven by a synthetic risk transfer that reduced risk-weighted assets by approximately $1 billion.
- Valley National Bancorp (VLY) anticipates low single-digit annualized loan growth for the rest of the year, with up to 3% growth in net interest income on a quarterly basis.
Negative Points
- The sequential reduction in net income was attributed to stable pretax pre-provision net revenue and an elevated loan loss provision.
- The elevated provision was driven by a conservative decision to place less value on personal guarantees, resulting in additional loan downgrades.
- Noninterest income declined compared to the first quarter of 2024, impacted by a negative valuation adjustment on certain fintech investments.
- Noninterest expenses increased modestly due to costs related to the credit risk transfer and higher FDIC assessment expenses.
- The company expects net charge-offs to remain around current levels for the rest of the year, indicating ongoing credit challenges.
Q & A Highlights
Q: Ira, you mentioned the 1.10% reserve to loan ratio and essentially, I guess, you're just getting there early here. But in terms of a continued mix shift towards C&I, I would think that would still tend to put additional pressure on that ratio. So it sounds like you're pretty comfortable with the 1.10%, but just kind of curious if you can walk through the thinking there is the idea that criticized and classified begin to moderate here as an offset? Just curious your thoughts.
A: Hey, Frank. This is Mark Seager. I think on the criticized classified front, if you see our migration this quarter that was lower than prior quarter and very much associated with what I mentioned, deemphasizing a personal guarantee in our decisioning on internal risk rating. I want to make it clear though, we think that loans with a guarantee will ultimately have materially better outcomes for the organization, and they continue to be very important in our really relationship-based model within the organization. But to your point about C&I, you're correct in the sense that C&I does traditionally carry a higher level of provisioning than CRE, and that's going to be a portion of the build. However, in the environment that we're in right now with continued higher entry rates, there is likely to be a continued modest migration in our CRE portfolio into criticized categories.
Q: Okay. But just want to -- so you're still comfortable even in that -- with that mix shift towards C&I in the reserve loan ratio at about 1.10%, you don't see a need for that to move higher in the near term?
A: No. The 1.10% is a continuation of our build, and we're comfortable with that level.
Q: Ira, the net interest income outlook, the 1.5% to 3%. I assume that's unannualized growth, but I want to confirm that. And then I want to ask if we get to rate cuts where you think you end up in the range.
A: Yes. Steven, this is Travis. So you're correct, that is unannualized growth that we're showing on a quarterly basis going forward. Our forward guidance assumes two rate cuts consistent with what the implied curve was at 6.30%. So that's factored in there. And then I think within that range, you could also -- static rates are captured in that range as well as there's just not much impact or change to our NII guidance dependent on the amount of rate cuts here in the near term.
Q: On slide 15, the commercial real estate, that's always very helpful. The $1.1 billion of commercial real estate that matured was retained. Did you guys -- can you walk us through did you need to make concessions there? Did these move into an extension period? Or were these full refinance or the borrower put in more equity and these are new commercial real estate loans?
A: So on the retained side, all of those loans were repriced at current market rates and sized appropriately to our standards. You'll note we have the modified other of $2 million that really represents a modified structure historic TDR-type relationship. The $1.1 billion was all at market terms.
Q: Are you guys looking at other use of synthetic instruments. Should we expect more of this in the second half? Or is it done?
A: Yes, Steven. This is Travis. Look, I mean we always kind of analyze what's out there and available. I mean I think you see more of these risk transfers being done in the industry. It's not unique to Valley necessarily. I think the auto portfolio was the low-hanging fruit, to be honest, but we continue to analyze other opportunities in other asset classes as well. So I think, again, not just for Valley, but for the rest of the industry, you'll see these being used to generate capital efficiency on a go-forward basis.
Q: Ira, I think you hinted at this, but I was hoping to get your thoughts on either selling commercial real estate loans or securitizing loans to accelerate and lower that CRE concentration how likely is that type of outcome? And if you do end up going that route, what would you be willing to tell us in terms of earnings or tangible book value impacts that you'd be able to absorb to achieve those goals faster?
A: I think you highlighted the appropriate guardrails, Matt, right? I think we've done a good job for a long period of time, prioritizing growth in tangible book value. And denigrating that tangible book value is something that's important to us and really what that threshold is. And once again, maintaining an earnings profile that's really set to continue to grow based on where we're seeing the balance sheet as well as the net interest margin becomes important to us. So it is a toggle as to how we think about the acceleration. That said, we do think there continue to be a lot of opportunities as to how we can reposition the balance sheet a little bit quicker when not denigrating what that earnings profile is. So there are opportunities and we continue to weigh them, and we will execute on them when we think it makes good sense not just from a balance sheet mix perspective, but also from an earnings profile perspective.
Q: You have -- I think $115 million of sub debt reaching a pre-set date next year. Any plans there paid off? Or should we expect some sort of pre-emptive raise to get ahead of it?
A: Matt, we always monitor that capital markets. I mean, I think we've kind of issued sub debt every 18 months, obviously, with some of the dynamics in the industry last year, right, that the sub-debt market and debt capital markets in general have has been a little bit slower, seeing some strengthening today. But I think on a regular basis, sub debt will be kind of a part of the capital stack, and we're always monitoring shareholder-friendly ways to enhance the balance sheet. So I'll leave it there.
Q: Could you talk about what drove the decision to accelerate the reserve build this quarter? And specifically, what does that mean for 2025? Are there any specific reserves embedded in that, that could drive a reserve bleed next year if charge-offs came through? Or do you expect to stay in that 1.1% range for the foreseeable future?
A: So we -- there are some specific reserves in there, but we foresee staying within the 1.1% ratio on a go forward. And we're very comfortable at that level, mate.
Q: In terms of the charge-offs this quarter, if you could speak to the couple of credits. Are there any -- is there any read across to the rest of the portfolio? As I look at the forward NCO guide, I think
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
