Valley National Bancorp Reports 15 Percent Annualized Loan Growth and Fourth Quarter Net Income

WAYNE, N.J., Jan. 31, 2019 (GLOBE NEWSWIRE) — Valley National Bancorp (NASDAQ:VLY), the holding company for Valley National Bank, today reported net income for the fourth quarter of 2018 of $77.1 million, or $0.22 per diluted common share, as compared to the fourth quarter of 2017 earnings of $26.1 million, or $0.09 per diluted common share, and net income of $69.6 million, or $0.20 per diluted common share, for the third quarter of 2018. The fourth quarter of 2017 results included charges mainly due to the impact of the Tax Cuts and Jobs Act (“the Tax Act”). See further details below regarding infrequent items impacting our comparative operating results, including the “Consolidated Financial Highlights” tables.

Key financial highlights for the fourth quarter:

• Loan Portfolio: Loans increased $924.2 million, or 15.3 percent on an annualized basis, to approximately $25.0 billion at December 31, 2018 from September 30, 2018 largely due to solid organic loan growth within most loan categories. See additional information under the “Loans, Deposits and Other Borrowings” section below.
• Net Interest Income: Net interest income on a tax equivalent basis of $223.4 million for the fourth quarter of 2018 increased $5.3 million as compared to the third quarter of 2018 largely due to our solid loan growth and higher rate new loan volumes.
• Net Interest Margin: Our net interest margin on a tax equivalent basis decreased 2 basis points to 3.10 percent in the fourth quarter of 2018 as compared to 3.12 percent for the third quarter of 2018.  See the “Net Interest Income and Margin” section below for more details.
• Credit Quality: Net loan charge-offs totaled $1.0 million for the fourth quarter of 2018, as compared to $231 thousand for the third quarter of 2018 and net recoveries of $772 thousand for the fourth quarter of 2017. Non-accrual loans represented 0.35 percent of total loans at December 31, 2018.
• Provision for Credit Losses: The provision for credit losses increased $1.3 million to $7.9 million for the fourth quarter of 2018 as compared to third quarter of 2018 largely due to loan growth and, to a lesser extent, higher allocated reserves for taxi medallion loans.
• Non-Interest Income: Non-interest income increased $5.7 million to $34.7 million for the three months ended December 31, 2018 from $29.0 million for the third quarter of 2018 largely due to a $6.5 million pre-tax gain realized on the sale of our Visa Class B shares during the fourth quarter.  Partially offsetting this item, Valley also sold all of the private label mortgage-backed securities classified as available for sale in its investment portfolio for an aggregate net loss of $1.5 million during the fourth quarter of 2018.
• Non-Interest Expense: Non-interest expense increased $2.0 million to $153.7 million for the fourth quarter of 2018 as compared to the third quarter of 2018.  During the fourth quarter, the amortization of tax credit investments increased by $3.6 million mainly due to the timing of tax credits.  Salary and employee benefits remained relatively unchanged as compared to the third quarter despite the recognition of $2.7 million of severance costs related to our Branch Transformation strategy during the fourth quarter of 2018 (See more information below). Net occupancy and equipment expense increased $1.3 million due to moderate increases in depreciation and repairs and maintenance as compared to the third quarter of 2018.  These increases were partially offset by a decrease of $1.5 million in professional and legal fees.
• Efficiency Ratio: Our efficiency ratio was 59.87 percent for the fourth quarter of 2018 as compared to 61.70 percent and 68.30 percent for the third quarter of 2018 and fourth quarter of 2017, respectively.  Excluding severance expense, merger expense, amortization of tax credit investments, litigation reserve expense, net losses on securities transactions, the gain on the sale of Visa Class B shares and branch related asset impairments, if applicable in the period, our adjusted efficiency ratio was 56.68 percent for the fourth quarter of 2018 as compared to 57.84 percent and 57.43 percent for the third quarter of 2018 and fourth 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 18.99 percent for the fourth quarter of 2018 as compared to 20.60 percent for the third quarter of 2018.  The decline in the effective tax rate was partly caused by a $2.3 million tax benefit related to the adjustment of Tax Act provisional amounts in our final 2017 tax returns completed during the fourth quarter of 2018. For 2019, we currently estimate that our effective tax rate will range from 22 percent to 24 percent.

Ira Robbins, CEO and President commented, “The progress that Valley and all our associates have made over the course of 2018 is tremendous.  We achieved record loan growth, embarked on a multi-year transformation of our delivery channels, and integrated our largest acquisition to date with great success.  As I look forward to 2019 and beyond, I am excited to continue our journey of providing the best possible experience and products to the customers and communities we serve.  All of the actions we are currently taking are expected to provide positive shareholder value over the long-term.”

Net Interest Income and Margin

Net interest income on a tax equivalent basis totaling $223.4 million for the fourth quarter of 2018 increased $52.0 million and $5.3 million as compared to the fourth quarter of 2017 and third quarter of 2018, respectively.  The increase as compared to the fourth quarter of 2017 was largely due to the  acquisition of USAmeriBancorp, Inc. (USAB) on January 1, 2018 and loan growth during 2018.  Interest income on a tax equivalent basis increased $17.6 million to $316.0 million for the fourth quarter of 2018 as compared to the third quarter of 2018, largely due to an increase of $871.7 million in average loans and a 11 basis point increase in the yield on average loans.  Interest expense of $92.5 million for the three months ended December 31, 2018 increased $12.3 million from the third quarter of 2018 largely due to higher interest rates on many of our interest bearing deposit products and FHLB borrowings, and a $756.9 million increase in average interest-bearing liabilities.  The increase in average interest-bearing liabilities was largely driven by both brokered and retail time deposit gathering initiatives, partially offset by lower short-term and long-term FHLB borrowings.

The net interest margin on a tax equivalent basis of 3.10 percent for the fourth quarter of 2018 decreased 3 basis points and 2 basis points from 3.13 percent and 3.12 percent for the fourth quarter of 2017 and third quarter of 2018, respectively.  The yield on average interest earning assets increased by 12 basis points on a linked quarter basis due to the higher yields on average loans and investment securities.  The yield on average loans increased to 4.61 percent for the fourth quarter of 2018 from 4.50 percent for the third quarter of 2018, mostly due to the high volume of new loan originations at current market rates. The increased yield on average investment securities was partly caused by a decrease in premium amortization on residential mortgage-backed securities, due to lower prepayments on such financial instruments. The cost of average interest bearing liabilities increased by 17 basis points to 1.72 percent for the fourth quarter of 2018 as compared to the linked third quarter of 2018.  The increase was due to a 23 basis point increase in both the cost of average interest bearing deposits and short-term borrowings, largely driven by higher market interest rates. The cost of average long-term borrowings also increased 21 basis points as compared to the third quarter of 2018 largely due to the change in the composition of such borrowings caused by the maturity and repayment of lower cost borrowings in the second half of 2018.  Our cost of total average deposits was 1.07 percent for the fourth quarter of 2018 as compared to 0.88 percent for the three months ended September 30, 2018.

Branch Transformation

As previously disclosed, Valley embarked on a continued strategy to overhaul its retail network in the second half of 2018. As a result, we identified several branches within New Jersey and New York that did not meet certain internal performance measures. Of those identified, we have closed 11 branches to date and expect to consolidate 9 additional branches by the end of the first quarter 2019.  The estimated annual operating expense savings from the 20 branch closures is expected to be approximately $9 million.  There were no material asset impairments related to actual and future branch closures during the fourth quarter of 2018 as compared to a $1.8 million charge in the third quarter of 2018.  Severance costs related to approved branch staff reductions totaled $2.7 million for the fourth quarter of 2018.

For the remaining branch network, we continue to monitor the operating performance of each branch and implement tailored action plans focused on improving profitability and deposit levels for those branches that underperform.

Loans, Deposits and Other Borrowings

Loans. Loans increased $924.2 million to approximately $25.0 billion at December 31, 2018 from September 30, 2018.  The increase was mainly due to continued strong quarter over quarter organic growth in commercial and industrial, residential mortgage and commercial real estate loans.  The growth within the residential mortgage loan portfolio was also partially driven by the purchase of approximately $105 million of CRA qualifying loans.  During the fourth quarter of 2018, Valley originated $98 million of residential mortgage loans for sale rather than held for investment.  Loans held for sale totaled $35.2 million and $31.7 million at December 31, 2018 and September 30, 2018, respectively.

Deposits. Total deposits increased $1.9 billion, or 8.3 percent, to approximately $24.5 billion at December 31, 2018 from September 30, 2018 mostly due to a $1.6 billion increase in time deposits from both brokered and retail deposit gathering efforts. During fourth quarter of 2018, Valley continued to increase its use of brokered CDs partly due to their relatively favorable pricing as compared to other available funding sources with similar terms, including FHLB advances. Money market deposit accounts also increased $176.8 million at December 31, 2018 as compared to September 30, 2018 resulting from ongoing retail and commercial account initiatives commenced in the third quarter of 2018. Non-interest bearing deposits; savings, NOW, money market deposits; and time deposits represented approximately 25 percent, 46 percent and 29 percent of total deposits as of December 31, 2018, respectively.

Other Borrowings. Short-term borrowings decreased $849.5 million, or 28.6 percent, to approximately $2.1 billion at December 31, 2018 from September 30, 2018 mostly due to lower levels of short-term FHLB borrowings caused by the success of our current deposit gathering initiatives. Long-term borrowings also decreased $74.5 million, or 4.3 percent, to $1.7 billion at December 31, 2018 from September 30, 2018 due to the normal maturity and repayment of FHLB advances during the fourth quarter of 2018.

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.  At December 31, 2018, our PCI loan portfolio totaled $4.2 billion, or 16.7 percent of our total loan portfolio and included all 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 totaled $98.6 million at December 31, 2018 compared to $88.7 million at September 30, 2018. The increase in NPAs from September 30, 2018 was mostly due to an increase of $10.0 million in non-accrual loans. The increase in non-accrual loans was primarily related to taxi medallion loans totaling $14.1 million that were reclassified to non-performing commercial and industrial loans during the fourth quarter of 2018 (See further discussion of our taxi medallion lending below), partially offset by better performance in the residential mortgage loan portfolio and one large payoff of a non-accrual commercial real estate loan. Non-accrual loans represented 0.35 percent of total loans at December 31, 2018 as compared to 0.33 percent of total loans at September 30, 2018.

Total accruing past due loans (i.e., loans past due 30 days or more and still accruing interest) increased $9.5 million to $67.7 million, or 0.27 percent of total loans, at December 31, 2018 as compared to $58.2 million, or 0.24 percent of total loans, at September 30, 2018.  The higher level of accruing past due loans was primarily caused by increases of $5.8 million and $4.5 million in total loans past due 30 to 59 days and commercial and industrial loans 90 or more days past due, respectively.

During the fourth quarter of 2018, we continued to closely monitor our NYC and Chicago taxi medallion loans totaling $121.8 million and $8.4 million, respectively, within the commercial and industrial loan portfolio at December 31, 2018. While most 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 December 31, 2018, the medallion portfolio included impaired loans totaling $73.7 million with related reserves of $27.9 million within the allowance for loan losses as compared to impaired loans totaling $66.5 million with related reserves of $26.3 million at September 30, 2018. At December 31, 2018, the impaired medallion loans largely consisted of $58.5 million of non-accrual taxi cab medallion loans classified as doubtful, as well as performing troubled debt restructured (TDR) loans classified as substandard loans.  Additionally, Valley currently has $22.5 million of performing non-impaired taxi medallion loans which are scheduled to mature in 2019, and $18.3 million that mature between 2023 and 2027. If the loans with 2019 maturities became TDRs upon maturity and renewal, an additional reserve of $8.6 million would be required based on the allowance methodology at December 31, 2018.

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 December 31, 2018, September 30, 2018, and December 31, 2017:

Our loan portfolio, totaling $25.0 billion at December 31, 2018, had net loan charge-offs of $1.0 million and $231 thousand for the fourth quarter of 2018 and third quarter of 2018, respectively, as compared to net recoveries of loan charge-offs totaling $772 thousand for the fourth quarter of 2017.  Overall, net loan charge-offs decreased to $658 thousand for the year ended December 31, 2018 from $2.1 million for the year ended December 31, 2017.  During the fourth quarter of 2018, we recorded a provision for credit losses totaling $7.9 million as compared to $6.6 million for the third quarter of 2018 and $2.2 million for the fourth quarter of 2017.  Overall, our provision for credit losses was $32.5 million for the year ended December 31, 2018 as compared to $9.9 million for the year ended December 31, 2017.  The increase in the 2018 provision was largely due to strong loan growth and increased allocated reserves for impaired loans mostly caused by taxi medallion loans.

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 at both December 31, 2018 and September 30, 2018, and 0.68 percent at December 31, 2017.  At December 31, 2018, our allowance allocations for losses as a percentage of total loans remained relatively stable in most loan categories as compared to September 30, 2018.

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 11.34 percent, 9.30 percent, 7.57 percent and 8.43 percent, respectively, at December 31, 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 fourth quarter 2018 earnings.  Those wishing to participate in the call may dial toll-free (866) 354-0432 (Conference ID: 4398224).  The teleconference will also be webcast live: https://edge.media-server.com/m6/p/9gtdqchn and archived on Valley’s website through Thursday, February 28, 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 $32 billion in assets. Valley is committed to giving people and businesses the power to succeed. Valley operates approximately 226 branches 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:

• 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 retain USAB’s customers and key employees;
• the inability to grow customer deposits to keep pace with loan growth;
• an increase in our allowance for credit losses due higher than expected loan losses within one or more segments of our loan portfolio;
• less than expected cost reductions and revenue enhancement from Valley’s cost reduction plans including its earnings enhancement program called “LIFT” and 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;
• the effect of the partial U.S. Government shutdown on levels of economic activity in the markets in which we operate and on levels of end market demand in the economy in general;
• 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 trade mark 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;
• 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;
• 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, 2017 and Quarterly Report on Form 10-Q for the period ended September 30, 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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VALLEY NATIONAL BANCORP
CONSOLIDATED FINANCIAL HIGHLIGHTS

SELECTED FINANCIAL DATA

NOTES TO SELECTED FINANCIAL DATA

SHAREHOLDERS RELATIONS
Requests for copies of reports and/or other inquiries should be directed to Tina Zarkadas, Assistant Vice President, Shareholder Relations Specialist, Valley National Bancorp, 1455 Valley Road, Wayne, New Jersey, 07470, by telephone at (973) 305-3380, by fax at (973) 305-1364 or by e-mail at tzarkadas@valley.com.

VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
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VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
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