Good day, and thank you for standing by. Welcome to the Valley National Bancorp Conference Call. At this time, all participants are in listen only mode. After the presentation, there will be a question and answer session. I'd now like to hand the conference over to your host today, Travis Lahn, Head of Investor Relations, please go ahead.
Thanks, Liz. Good morning, and welcome to Vale's teleconference to discuss the acquisition of Bank Lumi. Management's comments on today's call will include references to the investor presentation materials filed this morning. This investor presentation can be found on our website at valley.com. If you have not already reviewed our merger release or the associated Form 8 ks that was issued this morning, you may access both from the SEC website atsec.gov or our website at valley.com.
As usual, comments made during this call may contain forward looking statements relating to Valley National Bancorp and the banking industry. Valley encourages participants to refer to our SEC filings, including those found on Forms 8 ks, 10 Q and 10 ks for a complete discussion of forward looking statements. With that, I'll turn the call over to Ira Robbins.
Thank you, Travis, and welcome to those of you listening into the call. I'm so excited to be with you to discuss the acquisition of Banc Luimi, which we announced earlier today. This morning, I'm joined by Tom Iadanza, Our Chief Banking Officer and Mike Hagedorn, our CFO. Together, we will walk you through the strategic rationale for this compelling transaction and provide insight into the unique business lines that Liulumi brings to our organization. We will then open the call to your questions.
We have committed to M and A activity that aligns with the strategic priorities we have outlined publicly. These objectives include 1, driving sustainable organic growth 2, enhancing our revenue diversity And 3, generating efficiency gains, all while building an enduring culture that attracts and retains amazing talent. The acquisition of Bancoleme will accelerate these strategic objectives by introducing new growth oriented business lines That we believe will meaningfully enhance our franchise value and furthers Valley's missions to generate continuous organic growth With that in mind, I'd like to turn your attention to Page 3 of our investor deck. It is important to understand that Liulmi and Valley are cut from the same cloth. Both organizations are commercially focused and prioritize customer service and risk management.
We believe there is significant cultural compatibility between Lamy and Vale. The acquisition will also introduce new growth oriented businesses that we expect to leverage on a combined basis. This includes a technology and venture capital banking business as well as a private banking operation. These are differentiated platforms for Valley that we believe will position us for higher levels of sustainable growth and further efficiency gains, While diversifying our funding base away from our legacy retail network, these businesses also generate meaningful fee income, which will enhance our revenue diversity. From a balance sheet perspective, Leiomy operates differentiated niche models.
This along with the new geographic exposure that will be added in the loan and deposit portfolio further enhance our franchise diversity. The transaction also delivers on the conservative financial guardrails that we have previously described. Fully phased in earnings accretion is expected to be a strong 7%. Tangible book value dilution will be below 1%, With an earn back period of approximately 1 year using a crossover method, this is now the 3rd deal that we have announced in the last 3 years That will be neutral or minimally dilutive to tangible book value. We are proud of our growing track record of capital stewardship And shareholder friendly approach to acquisitions and believe this transaction is consistent with our history of managing risk and deals.
Slide 4 is a high level overview of Bankliomi. Liomi is an established commercial bank that has operated in the United States for over 60 years. They are a very well respected commercial competitor in our New York and Florida markets. On the bottom left, you can see a summary of Liulini's comprehensive Suite of Commercial and Private Banking Services. Before Tom and Mike elaborate on these, I want to highlight that Luimi has a sophisticated client base With diverse financial needs, we believe there are meaningful cross sell opportunities with value's expanded product set.
Liomi is an $8,000,000,000 bank with over $5,000,000,000 of loans and $7,000,000,000 of low cost deposits. The combination will improve our pro form a loan to deposit ratio, our funding costs and our average brand size. LiUme's differentiated deposit base is the result of a relationship based approach and unique funding verticals, including the Technology and Venture Capital Business and Private Bank. LiUMA is a high performing bank with a diverse revenue profile that is attractive to Vale. 20% of the revenues come from non interest income sources, primarily in the private bank and cash management areas.
Slide 5 is an overview of LiUMA's operating markets. While LiUMA's footprint has compelling demographics, we want to be clear. This acquisition is focused on business capabilities as opposed to geographic expansion. LiUme's technology and BC Banking teams The same goes for the Private Banking Groups in Florida and New York. These business lines have each been strategically positioned in attractive markets that will support their growth.
Over time, we expect to leverage these business capabilities across additional geographies. I now want to turn the call over to Tom Iadanza to talk about Leonume's loan and deposit portfolios and commercial banking business.
Thank you, Ira. Slide 6 shows loan composition by asset class and geography. Looking at the top half of the page, You can see that LiUi's relative C and I contribution is roughly twice as much as Vale's. On a combined basis, C and I will increase to about 17% of loans, while our relative CRE portfolio will remain stable. The bottom half of the page shows the geographic diversity of each portfolio.
Roughly 50% of LiUBI's loans are in New York and Florida, With approximately 20% in California and 8% in Illinois. As Ira mentioned, LiUme's footprint is strategically positioned to its various business lines, but the additional geographic diversity is a nice byproduct of the transaction. Slide 7 is a detailed overview of LiUme's commercial business. There is significant overlap of C and I and CRE Structured offerings in Metro New York. On the C and I side, LiUme has built out specialized middle market niches, which we believe can be leveraged further on a combined basis.
We will also be preserving a commercial relationship Leiumi's parent company in Israel. Leiumi has historically led large real estate transactions and participated loans to the Israeli parent. We will preserve this practice, allowing us to benefit from larger hold sizes of our loan portfolio. This represents a potential revenue synergy, which has not been included in our assumptions. Now turning to Slide 8.
This slide illustrates LiUme's high quality deposit base. Most notably, 58% of LiUmi's deposits are non interest bearing and their total deposit cost is 10 basis points. This reflects the strong commercial deposit base and the benefits of the VC Banking business. On a combined basis, 37% of deposits will be non interest bearing. Our pro form a loan to deposit ratio will also fall to 94% from 98 As you know, we have been focused on optimizing our delivery channels over the last few years.
Inclusive of both Westchester and LiUMA, our average branch size will now be nearly 30% above the peer median. We will continue to identify opportunities to improve these metrics and remain ahead of the pack. With that, I will now turn the call back to Ira.
Thanks, Tom. Slide 9 offers a closer look at Lumi's technology and BC Banking business. This will be a new business line to Valley, but it's one that we have considered building on our own in the past. By acquiring this capability Through Luimi, we will significantly accelerate this timeline to relevancy in this area. Bank Luimi has operated the business line domestically for over 20 years.
The pipeline of Israeli technology companies migrating to the U. S. Has provided a differentiated opportunity set for Bank Lumi. The Israeli parent has over 50% tech banking market share in Israel. As part of our ongoing relationship, We will continue to benefit as the U.
S. Bank of choice for these Israeli referrals. However, we will not be solely reliant on these referrals for growth. As we have said, Bank Lumi's technology and DC banking teams are strategically located in key technology hubs. LiUme currently banks over 20 VC funds and 500 technology companies and continues to establish additional relationships.
We believe there will be additional opportunities to expand this business in new markets going forward. Currently, The VC team contributes approximately $2,000,000,000 of low cost deposits to Lumi. Loan balances are only $60,000,000 The opportunities exist to increase venture and asset based lending on a combined basis. As you can tell, This is strategically compelling business capability that we are truly excited about. The tailwinds for growth in this area are significant And we believe that this acquisition positions us to benefit from both of those dynamics.
Now, I'll turn the call over to Mike to walk through the Private Banking business
Thank you, Ira. We overview the Private Bank on Slide 10. This business currently contributes approximately $30,000,000 of annual fees on over $4,000,000,000 of client wealth assets. Private Banking clients also hold approximately $1,800,000,000 of low cost deposits and $470,000,000 Have secured personal loans with the WEMI. The private bank services both domestic and international clients.
Valley has a modest existing presence in the international private banking space, primarily with deposit only customers. Sayumi's more comprehensive offering will enable us to cross sell wealth and loan products to these existing customers and enable us to attract new clients in the space. Having an established risk management and DSA AML program is key to consistent success in this area. Both Vale and Luimi have proven risk track records in this business and we will combine our best practices to ensure the risk remains well managed. Slide 11 shows an overview of the key transaction terms.
We are acquiring Luimi for approximately 90% stock and below 10% cash. Based on our closing stock price last evening, The aggregate consideration is approximately $1,150,000,000 Upon closing, Luimi's Israeli parent We'll own approximately 14% of the combined company. The Israeli parent has agreed to a 4 year lockup on its investment in Valley. The lockup dictates that 25% of the parent's investment will become eligible for sale upon each anniversary of the transaction closing. We anticipate that Vale and BancoImmi's Israeli parent will remain close partners for some time.
The parent will receive 2 seats on our Board and we have established a letter agreement outlining a continuing commercial relationship between our companies. As Tom mentioned, we intend to preserve the practice of participating loans to Israel. We also expect to be the bank of choice for Luimi's Israeli clients This relationship is important to both parties as Vale continues the legacy of Banque Luini in the U. S. From a modeling perspective, we assume 32.5% cost savings, primarily driven by back office overlap and system savings.
We also assume a 2.2% credit mark, of which approximately 55% is for non PCD loans Under the CECL methodology, as we have mentioned, there are identified revenue synergy opportunities, which are not currently contemplated in the model. We expect to close the transaction in the 1st or Q2 of 2022, Subject to regulatory approval and the approval of Vale's shareholders, Luweenie's Israeli parent and minority shareholders Have already approved the transaction. Slide 12 outlines the key financial impacts and resulting metrics for the combined organization. We expect approximately 7% of fully phased in earnings accretion and 1% tangible book value dilution With an earn back period of approximately 1 year, we have delivered on our stated financial discipline around M and A. Inclusive of Westchester and LiUMA, Valley will be a $51,000,000,000 bank We're the 29th largest publicly traded bank headquartered in the U.
S. Due to the success of our own funding initiatives And the addition of Westchester and Leiumi, our pro form a loan to deposit ratio will be 94%. We also want to highlight that our 2 recently announced transactions add upwards of $8,000,000,000 of deposits With only 12 physical locations. All else equal, with Westchester and Luini fully integrated, We expect to generate a return on average assets above 1.3% with an efficiency ratio of approximately 45%. We will continue to identify and execute on other additive revenue growth opportunities to drive further improvement in these metrics.
With that, I'll turn the call back to Ira for his closing comments.
Thanks, Mike. As you can tell, we are extremely excited about the combination of Bank Lai Umi And for the differentiated business capabilities that they are bringing. Continuing to leverage these business lines will position us for additional revenue growth And improved diversity across the franchise. Over the last few years, we have laid out clear strategic priorities and conservative guardrails Regarding M and A, we believe that this opportunity clearly defines and delivers on each of those. With that, I appreciate your time this morning.
I will now turn the call back to Liz to take your questions.
Our first question comes from Steven Alexopoulos with JPMorgan.
Hey, good morning, everyone.
Good morning, Steven. Good morning.
I wanted to start. So on the Q2, Paul, at least I thought you signaled that an M and A deal could be coming. Was this a deal that you were considering at the time or are there other deals that you were or maybe are still considering?
I think we definitely look at M and A across all different spectrums over a period of time. We've been talking To Avner and the members of the Bank of Leaming team for a period of time now and contemplating whether this was the right strategic alternative for us. I think as we continue to move forward, integrating Bank LME as well as the Westchester Bank are going to be key priorities for us. We want to make sure that we execute on it, deliver on it and provide the wonderful foundation that we think that this is going to be from a revenue diversification perspective. So as we move forward, those are going to be the key priorities for us.
Okay. All right. Was this a negotiated deal just Between you and them or was this an auction situation that you participated in?
Yes. I've been fortunate enough to know Avner for a very long time. We've had conversations over multiple period of times about the compelling benefits of our 2 organizations together. And I think I'll leave the process To be read upon when the S-four comes out.
Okay. And then so from a big picture view, if we look at the valuation of value shares For the deal, the market doesn't seem convinced of the organic growth potential of the company. And with every deal, I think you go through Kay now in the slide deck, You delay the market being able to better appreciate organic growth, right, and give you a better valuation. How do you balance continuing to move forward with deals When you don't yet have a premium currency and will you ever get to the point where you can prove to the market it's wrong you do have strong organic growth Or is this slide deck just going to keep moving forward with more and more letters in terms of deals?
I think that's a wonderful question and a conversation we have internally and Speak to our Board about frequently. I think as we look at M and A, the initiative has really shifted here at Valley. Historically, I think if you look over the last few years, it's been on how do we create M and A to right size the organization from an efficiency perspective. In the last couple of calls, we've been talking about M and A as being an inflection point for us and how do we really create and generate a foundation that we can build sustainable organic growth That is complementary to what we've been able to do organically. I'm super, super proud of the team that we've built here.
If you look at an organic basis, Our loan growth organically has been in the top quartile over the last few quarters and years. And that's something that we need to maybe do a better job of communicating to The Street, but overall I think the world is changing. The external environment is shifting dramatically and if we're not at the forefront as to how we think about So I think M and A will likely always be a component of who we are. We definitely are building an organic continuous business model here That's sustainable and diversified and we'll do a better job showing it.
Okay. That's helpful. And then final question. What percent of Lumi's loan portfolio might be early stage loans or is the number you called out all capital calls? And do they have a warrant portfolio?
Thanks.
Steve, the $60,000,000 that we referenced related to the tech and VC business is all that's there from the anything related to capital calls.
So no early stage loans from the 500 technology companies?
Yes. That's correct. That's right. It's been a deposit focused business line for them. As I said, they do the $60,000,000 of capital calls, but to this point, no material amount of early stage tech loans.
Okay. So you wouldn't have warrants in. Okay. Thanks for taking my questions.
Thanks, Steve.
Our next question comes from Stephen Duong with RBC Capital Markets.
Hey, good morning guys. Good
morning, Steve.
I guess, just on the transaction, how does that help with your asset sensitive if Rates start going up, say, sometime next year.
Yes. So if you look at their interest And their EVE calculations, they're an asset sensitive organization much like us, and it does not materially change The combined entity view on interest rate sensitivity.
Okay, okay, perfect. And then just one last one for me. I guess on the synergies, Ira, what are the major potential synergies that you see with, Leiomy?
I mean, quite simply, it starts with the addition of these additional business lines. And I think we have capacity To not only cross sell across these individual lines, but provide a much stronger foundation to let the Bank We Meet Bankers really go out and The parent bank in Israel, not just from a growth perspective on the traditional referral source, but I believe there's More opportunities for us to continue to do business with them, for them to expand their market presence in the U. S. And for us to really capitalize on the Product sets, skill sets that they have internally and I think there's going to be tremendous benefit from that. I think In most transactions, it's a little unique.
You typically look towards the acquired organization as having the ability to upsize their overall loan book. I think as Tom and Mike mentioned, because of the support we would be getting from the parent bank in Israel, we really have capacity organically to upsize some of the loan book that we've had and have a strong participation partner here. So those are some of The immediate, I think revenue synergies that we would get, once again, we haven't modeled any of that in any of the numbers that we presented today.
Great. I appreciate that.
Just to add to that, Steve. Yes. Mike mentioned their international Private Banking business. There's also a very robust domestic private banking or private clients business It has an infrastructure and a product set that we can layer Vale's broad client base onto. Furthermore, our consumer products is something we can offer to all of the Leiumi clients.
Got it. Thanks, Tom.
Our next question comes from Michael Perito with KBW.
Hey, good morning guys. Thanks for taking my questions.
Good morning, Mike. Good morning.
I have a few. First, I wanted to Follow-up on an earlier question on the venture banking platform. I guess, obviously, that the whole kind of technology side of the business For you guys, Ira has been an area of focus. And I'm curious, I mean, I'm sure it's a big number of company, I think it 500 technology companies, I'm sure a lot of them are not financial services oriented, but do you anticipate any kind of advantage over time of Or increased kind of investment in venture firms or I mean, I'm sorry, not the underlying technology companies like Similar to what like a Silicon Valley or something does as that business model evolves within Valley in the future and hopefully maybe Kind of getting some good lead time on perhaps new technologies or things that are coming to market?
Yes. I think, Michael, that's definitely something that could be an added benefit to it. But initially, that's not going to be something that we're really focused We think that there is opportunity to really grow and support this business to a much greater degree than what Bank Lien has been able to do historically. It only have $60,000,000 of loans against that type of customer base, is something that we think we can really expand upon, based on the full Our product suites that we're able to offer, we will invest capital in the business, we will invest capital in the people most importantly to make sure that this not is only a domestic an international business, but becomes a domestic business as well. So we intend to lever this to really help the organic growth diversification that we're looking for within our own individual business model.
So I think what you're talking about is potentially an offshoot and a benefit as to how we think about internal FinTech and technology integrated throughout Valley. That's definitely something that we feel will be beneficial to the organization, but really it's not the strategic impetus here. Okay.
And then maybe a follow-up kind of related to that comment, Ira. Just when I think about the 32% cost savings, That's not a net number per se, right? I mean, it sounds like there's several areas of the business you're acquiring, Some of the commercial offices that the venture platform, maybe the private banking expansion where they'll have to be investments to kind of hit some of the strategic milestones you're laying out, That's not net of the 32%, right? That could be potentially incremental costs over time that would hopefully result in revenue growth understandably, but is that the right way to think about it?
I think your last comment there is very important, right? There's not one side that doesn't happen without the other side. And we've been very diligent in our organization Our focus on positive operating leverage and making sure that the investments that we're putting forth are generating significant positive revenue streams across the organization. And we believe by investing in these individual businesses, you'll have significant growth in revenue as well. And I think to your point, Michael, well, we haven't modeled in additional Expenses associated here for leveraging Guppy's business, we haven't even come close to modeling in any of the additional revenue that we anticipate as well.
We wanted to be very conservative in
Got it. And then just lastly for me, I didn't see any kind of maybe Stupid question, but you're converting everything to the Valley Bank brand, correct? And is the technology Conversion, the largest driver of the 32% cost synergies because it doesn't seem like there's a lot of physical office reduction opportunities in the deal.
Yes, there's going to be a lot of back office opportunities as we sort of think about the combined organization And definitely everything is going to be migrating to Valley. From my understanding, having the Valley name in a tech and BC space isn't necessarily a bad thing.
For sure. Great. Thanks for taking my questions.
Thank you.
Our next question comes from David Chiaverini with Wedbush.
Hi, thanks. A couple of questions for you. So I'm looking at the new market entry Slide. So Palo Alto, Los Angeles and Chicago, should we be thinking about these areas as kind of like a new beachhead for growth And we could see these kind of grow over time or and then conversely, for instance, just picking on Chicago here with the $200,000,000 of deposits, would you consider divesting any of these branches or areas?
I'll let Tom comment a little bit here, but right off the bat, this is not a geography driven transaction. This is a people and business line driven transaction for us, and we think that these are wonderful businesses that just Happen to be located in these strong geographies based on the talent set and the opportunities that exist within each of these geographies. Tom, maybe you want
to add? Yes. As Ira pointed out, these are business line opportunities for us. Both are led by very seasoned professional Our managers with a solid staff and a good reputation in their markets, our anticipation is to focus and grow in both those markets Within the niches that they have created, they're attractive, they have a lot of commercial customers there and we think there's an opportunity for us.
Great. That makes sense. And then a question about loan growth going forward. You guys have guidance out there of Roughly 7%, we can call it high single digit type of growth. Will this transaction Change at all that outlook for growth, like for instance, the loan participations that you referenced, Would that be additive to that or would it be supportive of maintaining that high single digit type of outlook?
Right now, I mean, the pro form a modeling that we're putting forth here continues to look at that single digit growth number. Obviously, as you hear the excitement in our voice and we speak to the significant opportunities, we definitely anticipate a much more diversified stronger growth Model as we continue to move the organization forward.
Great. Thanks very much.
Thank you,
Our next question comes from Matthew Breese with Stephens.
Hey, good morning.
Good morning, Matt.
If we look at Page 7 of the deck, you go through Wayumi's Commercial Banking Suite. You highlight that they have a nationwide platform, experience leading large sophisticated deals, they have sophisticated customers. Could you just give us a bit more flavor for has been very granular loan size is pretty small for the balance sheet you have. Are these larger loans to larger customers? And could you just talk a little bit about that?
Sure.
Hey, Matt. Yes, their portfolio aligns very well with ours. They don't have Single large exposures, they don't have traditionally larger aggregate exposures. The customer base, we know well, the New York, Florida customer Kind of market and base that they have because it really is very similar to us. We compete regularly on those transactions in this market.
So I would say they're very similar in how they approach the market, how they assess risk, their policies and procedures aligned with ours. Don't think you're going to see a significant difference. Our balance sheet will allow them to grow with those customers and hold more.
I think just adding on to that Matt, I mean, one of the differences is as you talked about the granularity within our portfolio And just to be clear, sort of the risk nature as to how we think about opportunities here, while our risk culture Can stay the exact same by having the support from the parent bank enables us to go upstream a little bit more than what we've done historically. The structure as to how some of these deals have been done has been executed on behalf Bank will leave me in support of the parent bank as well. So they have really talented people in this organization that understand how to structure some of these deals, These larger size deals that will definitely be additive to us. But from an overall risk profile perspective and risk culture perspective, we don't see that changing. I think just having the capacity of The court with the parent bank in Israel is going to be something that's really added to us.
Yes. And just final point on this, they have A structure that includes trade finance, foreign exchange, that we can leverage our platform on. They are much more focused C and I organization in their markets than we have been, but this will allow us to really push with better products and more products on that front.
I'm sorry, go ahead.
Just one more final point on what Tom just said. I want to make sure it doesn't kind of get lost and everything else. This transaction because of the level of C and I in particular further diversifies Day 1's pro form a company, Something we've been talking about around diversifying our loan portfolio, we become a less CRE dependent or CRE total Bank on day 1. So that's an important part of our strategy that we've been talking about for some time.
Understood. And Ira, you'd mentioned the relationship with the parent. We've mentioned that a couple of times on the call. I was just hoping you could better flesh out for us that relationship With the parent, you mentioned loan participations and loan referrals. How often does that happen?
What are the economics of those transactions? Are there any mandates or requirements on your end that you need to satisfy in terms of dollar amounts of participations and referrals?
So we are obviously, as you've picked up, I'm really excited about the opportunity to really partner with the parent here. We have an agreement with the parent that we both intend to really refer and grow the business relationships. To be clear, there are absolutely 0 financial commitment requirements from a participation perspective that Vale has to deliver to the parent bank. That said, we are super excited and jazzed up about the opportunity to really Grow and what that benefit is going to be to us.
Okay. Two more quick ones for me. So the first one is just on the 4 year lockup. Can you give us some more color on how that lockup is expected to actually play out? I know 25% of shares are released per year and can be sold, but is that the expectation?
Yes, this is Travis, Matt. So that is you described the structure correctly. So on each anniversary of the transaction closing 25 percent of their shares will be eligible to be sold. That does not mean they will be sold in practice. And any sale would likely be done through an S3 registration, I believe.
Okay. Last quick one for me is just the $8,000,000,000 deposits, understanding that they have a very low cost, but Could you just give us some color for how these deposits performed during the 2015 to 2019 rate hike cycle? What was deposit beta? What was the max cost they achieved?
Yes, Matt. I think that's an interesting way to look at it, but I would say that the deposit composition here has probably shifted pretty dramatically. I don't think they had the $2,000,000,000 I know they didn't have the $2,000,000,000
of tech
deposits back then. So as most of us have seen through the crisis and some of the evolution that we On the technology side, deposits we think are going to perform pretty differently than they did in the last rising rate cycle. So Again, I'd point you back to the $2,000,000,000 of low cost tech deposits that did not exist previously. I think most of the private banking deposits are pretty sticky With relatively low betas as well. So I hope that's helpful color.
And I think just following on that comment, I think It's a little bit unique as to how they've really grown their overall deposit book. But if you think from an external perspective, is on deposit betas and consumer products are going to have very different deposit structures, customer behaviors than what they had previously. And it's important for us as we think about our funding base, the liquidity of it and the duration of it to make sure that we are diversifying as best We can into multiple different deposit funding sources. As the external environment changes, it's important that we just don't have such a significant reliance On the retail network.
And maybe lastly, I don't want it to get lost in translation. There just aren't many opportunities that are going to generate This kind of level of deposits with the branch light or physical distribution light strategy that exists at Luimi, That was very compelling to us and part of the deal rationale.
Okay, got it. I appreciate taking my questions. Thank you.
Thank you.
I'm showing no further questions in queue at this time. I'd like to turn the call back to Ira Robbins for closing remarks.
Thank you, Liz. More importantly, thank you for everyone for joining us today. We are excited and really motivated To make sure that we execute on this, to make sure that we deliver on the financial projections that we've outlined here and excited as to what the pro form a company is going to look like. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.